Credit Sweep

What Is a Credit Sweep?

A credit sweep is otherwise called an automated credit sweep. This term alludes to an arrangement between a bank and a customer (typically a corporation) by which all idle or excess funds in a deposit account are utilized to pay down short-term debt under a line of credit. The client as a rule sets a target balance that will determine the amount of its funds will be utilized. This greatly assists a client with decreasing its costs paid through interest on outstanding debt.

Understanding a Credit Sweep

A credit sweep is a cash management device that is particularly beneficial to large corporations that have numerous accounts and great variability in payments from everyday. On the off chance that the balance in a deposit account is over a target balance, a credit sweep account can be set up to consequently transfer the excess funds in the account to pay down the outstanding amount on a loan.

Most credit sweeps likewise have the contrary arrangement, by which in the event that the funds in the account are not exactly the target balance, there will be a drawdown on the credit extension to arrive at the target. The "sweep" part of a credit sweep is financial language; as in, the bank "cleared" the excess balance in one account to another.

Illustration of a Credit Sweep

Company ABC has a credit extension with Bank XYZ in the amount of $1 million. As of now, ABC is borrowing $300,000 of the $ 1 million, which should be repaid. ABC likewise has a cash deposit account with Bank XYZ that is utilized to make normal business payments or utilized for some other business purposes. Company ABC sets up a target balance that specifies that any amount in the deposit account that is more than $285,000 on some random day, can be utilized to pay down the outstanding $300,00 loan. During multi week, on a Friday, the amount in the deposit account is $295,000, so Bank XYZ utilizes the extra $10,000 over the target balance to pay down $10,000 of the $300,000 borrowed amount.

Sweep Accounts in Banks

On an additional technical level, banks use sweep accounts as a legal workaround on the disallowance of paying interest on business checking. By "sweeping" funds overnight to an investment vehicle or some likeness thereof, idle cash can be more effective in generating imperceptibly more return. Sweep investment vehicles are frequently tied to the money market, or all the more explicitly, "Eurodollar Sweeps" and "Repo Sweeps."

There are many forms of sweep arrangements. Commercial banks can manage the cost of additional sophisticated arrangements, so they appreciate more aggressive strategies, which typically offer a higher rate of return. More modest substances could utilize a sweep account essentially out of convenience. In that capacity, different levels of service are common while setting up a sweep arrangement.

Features

• A credit sweep is an arrangement between a bank and customer by which any excess funds in an account can be utilized to pay down the customer's debt.
• Banks frequently use sweep accounts to assist customers with earning interest on their idle cash.
• This type of arrangement is set up consequently and assists customers with diminishing their costs paid through interest on outstanding debt.
• Credit sweeps are offered by banks as a cash management instrument to assist customers with dealing with their accounts.