I am referring to sweeping the excess funds out of your checking account into an overnight sweep account in order to earn interest. If you are using a sweep, it is very important that you make sure you should be using a sweep. In years past sweep accounts made a lot of sense for a lot of businesses. But…I would venture to say that given the current economic climate, probably some 90% of businesses who went into sweeps should consider getting out of them. Many business owners have already had that discussion with their banker and stopped the service. But I also know there are lots of folks out there who don’t realize they should suspend the service.
I’ll try and help. Do you know how much you pay in service charges each month? If the answer is yes, do you know what is included in that charge? Most banks don’t provide you with an itemization (called an account analysis statement), but rather they just debit your account on the 1st-10th of each month for the services you used the prior month. Make sure you know what you are paying for. If you are not receiving an account analysis statement each month in addition to your checking account statement, ask your banker to start sending them to you. If you want one right away, call your bank’s customer service department, give them your account number and ask them to provide you with one immediately for the most recent month.
Overnight sweep services typically cost from $75 – $150 or so each month. Clue #1 to turn off the sweep is: how much are you earning in interest each month? If you are earning less that the fee you pay for the service then turn it off. At the current going rate of 25 basis points (1/4%) for interest earned on your sweep balances, you need to carry balances of $600,000 at all times to cover the cost of a $125 sweep service charge. Clue #2 – if you are not keeping sweep balances in this range, turn the service off. Clue #3 relates to how much your bank is paying you in Earnings Credit for the balances that are not swept. Is that rate (called the ECR rate) higher than the rate you are earning on your sweep investment? If it is, it may make sense to disconnect the sweep and let those balances accumulate enough “credits” to offset your service charges. You will be forgoing interest, but you also may be offsetting your service charges to a greater degree. In order to find out what ECR rate you are being paid, refer again to the account analysis statement. That will be the only place you will find it unless you ask your banker directly. I will write a lot more about Earnings Credit Rates in a future post as it is important for you to understand what it means to your business.
#3 is a little more involved but your banker should be able to walk you through this exercise. Do not assume your banker has made these adjustments for you or will bring them to your attention. Monitoring your account on a regular basis is not on their radar screen, I can assure you.