Central asset accounts keep money working

by John Qua

for the Business Journal

Central asset accounts those innovative financial management tools that combine investment, checking and borrowing capacities in a single account have been around for 21 years, introduced by Merrill Lynch in 1977.

A convenient cash-management tool, the accounts quickly became popular with individuals, and a similar account was developed to manage the assets for small and mid-sized businesses.

Today, Merrill Lynch alone holds more than $68 billion in assets within these business accounts. Central asset accounts have proved more attractive than traditional banking arrangements for many businesses.

Convenience and the opportunity to have all of a business' assets working all the time account for much of the appeal of these accounts.

Convenience and increased opportunity. A central asset account integrates traditional checking, investment and borrowing into a single account, which makes efficient business cash management easy.

A traditional banking arrangement requires that you move money from money market accounts to checking accounts to cover disbursements when due. You also might establish and draw on a separate line of credit to augment your checking account when your resources are low.

With a traditional checking account, you must guess how much money you need in your account and when it's needed. Most businesses simply overfund their checking accounts just to be sure they can cover their obligations.

Since business checking accounts by law cannot earn interest, withdrawing money from money market accounts prematurely and carrying large balances in non-interest-earning checking accounts can cost a lot in terms of potential interest. Drawing on a line of credit before it is necessary can also increase costs by incurring added interest expense.

A central asset account accomplishes the same tasks without the need to manually move assets around. The account saves you time and effort by automatically putting funds where they need to be. By eliminating guesswork and transferring your funds exactly when they're needed, a central asset account can offer significant savings.

A central asset account automatically sweeps idle incoming cash into a money market account to earn interest or dividends until it's needed. An optional line of credit is accessed automatically when money market account balances are depleted.

When you have a balance on your line of credit, incoming funds are automatically used to pay it down to minimize your interest costs.

A central asset account also provides the services of a brokerage account. Although part of your business capital needs to be liquid, most businesses have some capital that can be invested in short and intermediate term securities for potentially higher yields.

A broad array of investments can be purchased within a central asset account. You can sell securities in your account at any time, or borrow against their value, to meet working capital needs.

A case history. Let's take a look at a hypothetical business and how a central asset account improved its bottom line. The business maintained a $1 million credit line at a local bank, but used only $500,000 annually.

The bank charged an interest rate of 10 percent a year for the credit line used, which meant the business had $50,000 a year in interest expenses. In addition, the business maintained a separate checking account with an average $200,000 balance.

Switching to a central asset account, the business's line of credit was linked to its checking account, which reduced the average loan balance from $500,000 to $300,000. With the same interest rate, the business owner's interest expenses were reduced from $50,000 to $30,000 a year.

Taking service fees into account, the change produced $15,000 a year in additional revenues. Given a 10 percent profit margin, the business would need to increase annual sales by $150,000 to realize the same $15,000 net benefit.

Specialized account features. It is important to select a central assets account that has been created specifically for businesses and offers an array of business cash-management services and options tailored to the needs of small to mid-sized businesses. Here are some features to look for:

?Credit/financing options. A comprehensive account should offer a range of financing options, including a commercial line of credit, margin credit and term financing for equipment or other special purposes. Look for a financing vehicle that enables you to use periodic high credit balances to reduce your term loan interest.

?Electronic funds transfer. Electronic funds transfer allows account holders to automatically transfer funds between a business central asset account and accounts at other financial institutions through the Automated Clearing House network. Look for transfers that can be initiated with a toll-free call 24 hours a day, seven days a week without cost.

?Electronic charge-card processing. If you accept charge cards, look for electronic charge-card processing with fast, direct credit of funds to your business central asset account. Make sure that the service accepts a broad range of cards.

?Electronic tax payments. Central asset accounts that enable you to debit electronic federal tax payments directly from the account to cover federal payroll, excise and income taxes are a must.

Continuing innovation. Although business central asset accounts have existed for more than a decade, they continue to be improved with services that help businesses manage their money.

?Online account access. Account holders today might have access to their accounts and financial consultants via the Internet to obtain account information, research reports, financial news, delayed stock quotes and up-to-date market data. In addition, the ability to pay bills electronically online is becoming popular.

?Business debit cards. Business delayed debit cards are also available within some business central asset accounts.

Funds for all purchases made with a debit card during the month would be withdrawn from your account on the same day each month, so you know exactly when your account will be tapped. It's important to look for delayed debit cards that offer the ability to set predetermined dollar limits on a set spending cycle.

Review your business cash-management arrangements. The business environment is changing more rapidly today than at any time in history, so the tools that business owners need to meet the daily challenges of this environment must evolve in step.

That's why you should regularly review your business cash-management arrangements to ensure that they are helping to keep your business competitive. The business central asset account is becoming an ever more effective tool for making the most of your business assets.

(John Qua is senior vice president and director of business financial services for Merrill Lynch.)

[[In-content Ad]]