Credit Sweep

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Credit Sweep

What Is a Credit Sweep?

An automated credit sweep is another name for a credit sweep. This is a contract between a bank and a client (typically a company) under which all idle or extra money in a deposit account are utilized to pay off short-term debt under a line of credit. The customer often establishes a goal balance to decide how much of its money will be spent. This significantly reduces the expenses incurred by a customer due to interest on existing debt.

Key Takeaways

  • A credit sweep is an agreement between a bank and a client under which any extra money in an account are utilized to pay down the customer’s debt.
  • This sort of agreement is put up automatically and assists consumers in lowering their expenditures incurred due to interest on outstanding debt.
  • Banks use credit sweeps as a cash management tool to assist consumers in managing their accounts.
  • Sweep accounts are often used by banks to help consumers earn interest on their idle cash.

Understanding a Credit Sweep

A credit sweep is a cash management technique that is particularly useful for big organizations with several accounts and high day-to-day payment unpredictability. If the balance in a deposit account exceeds a preset limit, a credit sweep account may be set up to automatically transfer the surplus cash to pay down a loan obligation.

Most credit sweeps also offer the reverse arrangement, in which if the funds in the account are less than the goal amount, the line of credit will be drawn down to meet the target. The term “sweep” refers to financial jargon; for example, the bank “swept” the remaining money in one account to another.

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Example of a Credit Sweep

Company ABC has a one-million-dollar credit line with Bank XYZ. ABC is now borrowing $300,000 of the $ 1 million that must be returned. ABC also maintains a cash deposit account with Bank XYZ, which is utilized for regular business payments and other business reasons. Company ABC establishes a goal balance that states that any money in the deposit account that exceeds $285,000 on any given day may be utilized to repay the outstanding $300,00 loan. On a Friday of one week, the deposit account balance is $295,000, thus Bank XYZ utilizes the extra $10,000 over the goal level to pay off $10,000 of the $300,000 borrowed amount.

Sweep Accounts in Banks

On a more technical level, banks employ sweep accounts to circumvent the limitation on paying interest on business checking accounts. Idle cash may be more successful in earning slightly higher returns by “sweeping” assets overnight to some kind of investment vehicle. Sweep investment vehicles, or “Eurodollar Sweeps” and “Repo Sweeps,” are often linked to the money market.

There are several types of sweep configurations. Because commercial banks can afford more intricate arrangements, they can pursue more aggressive methods that often provide a greater rate of return. Smaller businesses may utilize a sweep account for ease. As a result, several degrees of service are frequent when establishing a sweep agreement.

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