Many business leaders are feeling the pinch of higher interest rates.  Rates are the highest they have been in the last 15 years and could inch up further until inflation is tamed.  Higher interest rates make it more costly for businesses to borrow money on lines of credit, term, and trade debt.  In some cases, businesses that are interest-sensitive are also seeing less demand for their goods and services.   Now is the time to make sure that your deposits and cash management systems are working harder for your business.

Some business leaders think of banks as strictly lenders, but there are advantages to a more holistic relationship. Because banks want deposits as well as loans, there are benefits to having your entire banking relationship in one place. Banks can often offer better interest rates on deposits and loans when they have the full banking relationship.

In order to maximize your cash flow in this higher interest rate environment you might consider setting up a sweep account. This treasury management tool allows commercial businesses, nonprofits, religious organizations, and individuals to put idle dollars to work.  It’s a simple concept. Here is how a sweep account works:

A sweep account moves excess funds between a non-interest-bearing checking account to either pay down a loan balance or sweep to a deposit account that earns higher interest. This happens automatically on a nightly basis. The next morning, a portion of the excess deposit balance or a draw on the loan is transferred back to cover any checks that may come in and therefore avoids overdrafts.

The convenience of sweep accounts is especially ideal for busy business owners who don’t have time to constantly monitor their checking account so they know when to move funds. A sweep account is an easy way to earn interest on excess funds or pay down lines of credit in order to save on interest expense.  A sweep is automatic and takes no manual intervention on the business owners part. 

Individuals can take advantage of cash sweep accounts, which maximize investment earnings by transferring excess cash into interest-earning accounts or investment funds. In both cases, cash sweeps provide a way for borrowers to utilize their excess cash more effectively.

The savings can add up.  For example, a business with an excess $200,000 balance in their demand deposit account can reduce interest costs by sweeping the money to paydown their line of credit.  If your line of credit is presently floating at Prime Rate (7.75%), this would equate to a savings of approximately $42.00 a day.  While that might not seem like a lot, it adds up to over $15,000 a year, simply by putting idle dollars to work.

As a trusted advisor, we reach out to customers who have excess balances in their account to explore how a sweep account can work to their benefit. There is a monthly cost to set up a sweep account, but it is generally small compared to the earnings.

While sweep accounts have been widely offered for years, during a lower interest environment when deposits were paying practically zero, this treasury management tool fell off the radar for many.  With the current economic landscape where rates have increased rapidly, it is worth revisiting your cash management protocols.

Talk to a trusted advisor and see how you can make your money work harder for you.

Originally published in the St. Louis Business Journals Ask The Expert Column on 2/17/2023 by Danny Pogue, President – Commercial, Retail & Small Business Banking.