I have mentioned before that sweep accounts for small businesses have fallen out of favor because of the fact that it is difficult to generate enough interest income from your investment to pay for the service. The return on overnight sweep accounts is paltry – usually in the 0.05% to 0.25% range. At 0.10% interest, an investment of $100,000 will yield you a little over $8 in interest each month. Even though sweep investment accounts do not work for most now, there is another type of sweep worth considering. If you maintain a balance of $30,000 or more on your business line of credit on a regular basis, it makes sense to ask your bank to look at whether or not you should connect your line of credit to your checking account. This is a “Sweep to Line” service. Instead of your balances sweeping to an investment, your balances instead go to pay off your line of credit. This makes a great deal of sense because you are probably paying around 5-6% per annum in interest on that line. The bank is going to charge you a fee for the sweep to line service, but if that fee is $125 per month, then $30,000 outstanding on your line is the breakeven point.
Let’s do a quick illustration. Suppose you have a balance on your line of credit of $150,000 at 5.0%. You are sweeping into an overnight investment account and the balance there is $600,000. The cost of a sweep to investment service (yielding 0.20%) is $90/month and the cost for a sweep to line service is $125/month.
With Sweep to Investment: Annual Service Charges = $1,080 ($90/month for the sweep to investment service); Annual interest income from sweep = $1,200; Annual line of credit interest expense = $7,500 ($150,000 x 5%/annum). Your annual net out-of-pocket expense is $7,380.
With Sweep to Line (drop the investment): Annual Service Charges = $1,500 ($125/month for the sweep to investment service); Annual interest income from sweep = $0; Annual line of credit interest expense = $0 (the line has no balance as the funds in the investment account paid it off). Your annual net out-of-pocket expense is $1,500.
Some business owners and/or bookkeepers start off skeptical because they think it means extra work on the reconciliation side. They see daily debits and credits sweeping to and from the line. The way to handle the reconciliation is to use the balance on the line and the balance in the checking account on the cutoff date from the bank statement. Don’t worry about any other days.
Getting rid of the investment and linking your line of credit to your checking account results in annual savings of $5,880.
When rates recover to more generous levels, it will be time to consider getting back into the sweep to investment. Your account can also be configured to provide you both services simultaneously. In that instance, if there is a balance on your line, that gets paid down first from funds in your checking account. After the line balance is zero, then anything left over will sweep up into the investment. Conversely, if funds are needed, then the investment is liquidated first before the line is ever advanced.
It is important to look at your situation at least once a year, preferably more because situations change and create a need for adjustments. I would guess that close to 95% of small businesses invested in sweeps 5 years ago have either removed that service or need to do so. If they haven’t, it is only because they have not been paying attention.