2/15/2024 0 Comments Initial cash sweepIn other cases, a lender may require in the loan agreement that the borrower use a cash sweep account in order to pay down the debt more quickly over time. This in turn improves their financial stability and their ability to secure venture capital financing. This can be furthered explained in this sample balance sheet from Company ABC:īeginning cash balance (Total cash at hand)Ĭash Sweep = $326,800,000 – $103,200,000 + $68,200,000 = $291,800,000Ĭompanies that use cash sweep accounts can ultimately improve their debt-to-equity ratio by paying off their debts earlier than what was scheduled. The amount of cash available for a cash sweep is calculated as follows:Ĭash Sweep = Total Cash at Hand – Minimum Cash Balance for Operations + Debt Service Cash Flow Funds that are added in the sweep account are transferred according to the specifications of the customer and most cash sweeps occur once a day. It can be done within the same banking institution or from one bank account to another bank account from another institution. Some banks offer an overnight Treasury sweep, where excess cash in the sweep account is “swept” into government bond holdings to earn interest all night and then is transferred back to the cash account at the beginning of the next business day.Ī cash sweep is an automatic bank process where funds are transferred from an investment account to a deposit account or vice versa with the purpose of minimizing the risk of incurring more or higher interest rates from their debt. For banks, it can be either a checking or savings account for either an individual or a business. In many cases, a cash sweep fund is a money market mutual fund or slush fund. For a corporation, this means the amount of money that is left after all regular debt payments and operational expenses have been taken care of.įor individuals, this usually means the amount of money that is left after all personal expenses and regular bill payments have been made. The amount of cash that is “swept” using this feature is the balance that remains after all other business or personal financial obligations have been satisfied. The vast majority of banks, investment companies, mutual fund companies and other financial institutions offer this service as a courtesy free of charge. A cash sweep can automatically “sweep” any excess money in their cash account to a mutual fund or other investment that they choose. Companies therefore use the cash sweep feature to reduce their outstanding liabilities instead of letting their money sit idle in a cash account.Ĭash sweep accounts are also used by individuals who want to keep their money invested on a daily basis. This process helps a company to minimize risk and liability as well as pay its debt at a faster rate than what is expected or agreed upon. The payment could be made a percentage of the excess flow, which is usually dependent on what event generated the excess cash flow.A cash sweep is the use of a company's excess cash to pay outstanding debts ahead of the scheduled payment date instead of giving it to their investors or shareholders. If an event occurs that results in excess cash flows as defined in the credit agreement, the company must make a payment to the lender. ![]() If excess cash flow is generated, a lender might require a repayment that is all or some portion of the excess cash flow amount.Įxcess cash flows conditions are written into loan agreements or bond indentures as restrictive covenants to provide additional cover for credit risk for lenders or bond investors. ![]() However, the lender does not want to create so many restrictions that it hurts the financial viability of the company. ![]()
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