Cash Sweep

Business, Legal & Accounting Glossary

Definition: Cash Sweep


Cash Sweep

Video Guide For Cash Sweep




Full Definition of Cash Sweep


If a company has more money than it needs, it can use that money to pay off debts before the due date instead of giving it to investors or shareholders.

This process helps a company to keep its risk and liability low, as well as pay off its debt faster than agreed upon. Companies, on the other hand, use the cash sweep feature to pay off their debts instead of leaving their money in a cash account.

A cash sweep account is also a good choice for people who want to keep their money invested on a daily basis. A cash sweep can automatically “swap” any extra money in their cash account to a mutual fund or other investment that they choose, so they don’t have to think about it. People who work for a lot of different businesses that deal with money usually give this service as a free favour.

The amount of cash that is “swept” by this feature is the amount that is left over after all other business or personal financial obligations have been paid off. For a business, this is the amount of money that is left after all debts and operating costs have been paid.

For people, this usually refers to the amount of money that is left over after all personal expenses and regular bills have been paid. Most of the time, a cash sweep fund is a money market mutual fund or a slush fund. As for banks, they could have either a checking or savings account for a person or a business.

As long as there is money in the account, it is “swept” into government bond holdings and earns interest all night. At the start of the next business day, it comes back to the money in the cash account.

A cash sweep is an automatic bank operation that transfers funds from an investment account to a deposit account or vice versa in order to reduce the danger of paying additional or higher interest rates on their debt. It can be done within the same financial institution or from one bank account to another from a different financial institution. Funds added to the sweep account are moved according to the customer’s preferences, and most cash sweeps occur once per day.

The following formula is used to determine the amount of cash available for a cash sweep:

Cash Sweep = Total Cash at Hand – Minimum Cash Balance for Operations + Debt Service Cash Flow

This can be seen in this example balance sheet from Company ABC:

In Thousands

Beginning cash balance (Total cash at hand)

$326.8

(-) Minimum cash balance for operations

$103.2

Excess cash

$223.6

(+) Cash flow available for debt service

$68.2

Cash available for sweep

$291.8

Therefore,

Cash Sweep = $326,800,000 – $103,200,000 + $68,200,000 = $291,800,000

Businesses that utilise cash sweep accounts might eventually improve their debt-to-equity ratio by repaying obligations ahead of time. As a result, their financial stability and capacity to seek venture capital financing improve.

In other instances, a lender may demand a borrower to use a cash sweep account in order to pay off the debt more quickly over time. This type of provision is frequently utilised by lenders lending to borrowers in high-risk industries like energy or commodities. The cash sweep effectively demands the borrower to make additional loan payments with their extra cash in addition to their normal loan payments. This can assist compensate for decreased loan payments made during periods of low cash flow. Borrowers may also extend this provision to lenders to extend the term of a loan.

Individuals should not see cash sweep accounts as long-term investments. The money is only invested for a brief length of time and then a monthly interest or dividend payment is paid. As a result, this type of account is mostly used for short-term money management.


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Definition Sources


Definitions for Cash Sweep are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 26th January, 2022 | 9 Views.