FDIC Sweep Accounts for Startups: How Cash Above the Limit Gets Insured

You open one account with a provider, and the provider places your deposits at a network of partner banks. When your balance passes a set amount, the excess is moved out (swept) to additional banks, each holding less than the insurance limit for you. You still see one balance, and you deal with one login.

The insurance is the standard FDIC deposit insurance at each partner bank, not a special product. Coverage depends on the funds actually being placed at insured banks, so the details of the program matter. Some providers use a third-party network, and some use their own list of partner banks. Read the disclosures to see which banks hold your money, how quickly balances are moved and what happens if a partner bank fails.

It's designed for one risk: a bank failing while holding your deposits. If a bank fails, FDIC insurance covers deposits up to the limit at that bank, and a sweep program keeps each balance within it.

It doesn't cover:

• Fraud or account takeover. Someone who gets into your account and sends money out is a different problem, handled by controls such as approvals and limits.
• Investment losses. Money market funds and Treasury bills held through a provider aren't FDIC insured, even if they sit in the same dashboard.
• Balances above the program cap. Programs have a maximum total, so confirm yours.
• Overlaps with your other accounts. If you also bank directly with one of the partner banks, your combined balances there can exceed the limit.

In March 2023, the failure of Silicon Valley Bank left many startups with balances far above the standard limit. Uninsured depositors were ultimately made whole through a government exception, but nobody should plan on that happening again.

Treat this as due diligence, and confirm each answer in writing or in the current terms:

1. Which banks hold my deposits, and how do I see the list?
2. What's the maximum insured balance in the program, and does it differ by entity type?
3. How fast can I withdraw, and are there cut-off times for wires or ACH?
4. Are there fees, or is a fee taken from yield?
5. What's the interest rate, and is it variable?
6. What happens if the provider itself has a problem, and where are the records of my deposits kept?
7. How do I tell the difference between insured cash and uninsured money market or Treasury balances in my account?

If you can't get clear answers, keep the balance in a form you understand. A provider comparison is in Mercury, Brex and Relay multi-entity sweep accounts.

Usually you can move funds out, but not always instantly. The provider needs to pull your balance back from partner banks, which can take a business day or cut-off times may apply. So keep enough in a fully liquid operating account for payroll and near-term bills, and let the sweep hold the reserve.

Say you need $200,000 for payroll on Friday. In this example, don't plan to release it from a sweep on Friday morning; move it Wednesday or Thursday. A 13-week forecast helps you time these transfers, and you can pair it with a written policy as covered in startup treasury management.

A sweep gives you bank deposits with FDIC insurance and modest interest. A money market fund is an investment, not insured, that holds short-term securities and generally aims for a stable value. Treasury bills are backed by the US government, are not FDIC insured and pay interest based on the market, but you may have to wait for maturity or sell.

Many startups use all three: a sweep for safety, a money market fund or T-bills for yield on reserves that won't be needed soon. The trade-off is insured status versus yield and access, so decide by how soon you need the cash. Compare with profit first structures and payment timing in ACH, wire and RTP.