What Is a Cash Sweep & How It Benefits Your Business

From the Great Recession until early 2022, sweep account yields were negligible, and many accounts still yield less than 1% per year. But recently, some brokerages have launched money market- and CD-linked sweep accounts that yield anywhere from 1.5% to 5.1% per year. In Year 4, the term loan B balance is $64m after deducting the mandatory amortization. The excess cash amounts to $40m – therefore, the cash sweep is also equal to $40m. A cash sweep, or debt sweep, is the mandatory use of excess free cash flows to pay down outstanding debt rather than distribute it to shareholders. 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.

Understanding the different types of cash sweep accounts is essential for businesses to tailor their cash management strategies effectively. Each type offers unique benefits and can be aligned with specific financial goals, whether it’s maintaining liquidity, earning interest, or reducing debt. Cash sweeps play a vital role in improving cash flow management by automating the transfer of excess funds. This means you no longer have to manually monitor your account balances to ensure you’re not holding too much idle cash. Instead, the system automatically moves funds into higher-yield accounts, helping businesses manage their cash more efficiently. A cash sweep program helps businesses optimize their finances by automating the transfer of idle funds into higher-interest accounts.

What is Cash Sweeping?

Once funds are swept to a program bank, they are no longer held in your brokerage account and are not protected by SIPC. However, these funds are eligible for FDIC insurance through the Program Banks subject to FDIC insurance coverage limits. A cash sweep helps individuals or organisations optimise the use of their cash by ensuring that passive funds are not left sitting in low-interest accounts. If the borrower has remaining excess cash, the borrower can periodically pay down debt early – assuming the credit agreement does not contain language prohibiting such prepayments. In Excel, the formula for the cash sweep must calculate the free cash flow once all required payments are met, including the mandatory amortization of debt.

• A cash sweep can automatically “sweep” any excess money in their cash account to a mutual fund or other investment that they choose.
• Next, we’ll be assuming a full cash sweep – i.e. 100% of the excess cash goes towards repaying the principal balance.
• This tiered approach allows companies to balance the need for liquidity with the desire to maximize returns on surplus cash.
• Furthermore, cash sweep arrangements can help manage risk by diversifying investments or reducing exposure to counterparty risk.
• Today, there are interest-bearing checking accounts, but they usually pay far less interest than investment accounts.

How Cash Sweeps Work

• Collection agencies can access your bank account, but only after a court judgment.
• This means you no longer have to manually monitor your account balances to ensure you’re not holding too much idle cash.
• By establishing a cash sweep agreement, the bank automatically transfers any funds exceeding a predefined threshold, say $50,000, into a high-yield investment.
• First, you’ll work with your bank to establish the terms of the program, including the target balance for your checking account (the minimum amount you wish to keep in it) and the frequency of transfers.

This simple yet effective process can increase returns, streamline cash management, and reduce manual efforts. Below are the main benefits your business can gain from implementing a cash sweep program. For a corporation, excess cash refers to any remaining cash after operating expenses, and regular debt has been paid.

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In such a case, a lender would require the borrower to use a percentage of their excess cash to pay down the existing loan. Whether you’re busy managing operations or handling other financial tasks, the automated nature of cash sweeps ensures that your business’s surplus funds are always working for you without additional effort. The convenience of automation means that your business can enjoy the benefits of higher returns and better cash management without constant oversight. This makes it a hassle-free solution for businesses that don’t want to disrupt their existing financial arrangements. Most banks offer flexible cash sweep programs that are easy to implement, ensuring businesses can start benefiting from them quickly.

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Like the article mentions, this can be the entire amount of an account or just a portion. In my case, I transfer all of the money over, and then when I write a check or withdraw money, that amount is transferred out of the investment account to cover the check or withdraw. For instance, there is $40m in excess cash in Year 4 with a beginning term loan B balance of $68m. Additionally, the minimum cash balance of the company (i.e. the amount of cash required to be on hand by the company to fund working capital needs) must also be taken into consideration. The Cash Sweep refers to the optional prepayment of debt using excess free cash flows in advance of the originally scheduled repayment date.

The formula for calculating the mandatory amortization can be found below – note the inclusion of the “MIN” function to prevent the ending balance from falling below zero. Under a contractual obligation, the borrower must repay 2.0% (or $4mm) of the original principal back to the lender to avoid defaulting. In our model example, our company has one tranche of debt – Term cash sweep meaning Loan B, with the borrowing arrangement lasting for 5 years.

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Realized1031.com is a website operated by Realized Technologies, LLC, a wholly owned subsidiary of Realized Holdings, Inc. (“Realized Holdings”). Depositing a big amount of cash that is $10,000 or more means your bank or credit union will report it to the federal government. The $10,000 threshold was created as part of the Bank Secrecy Act, passed by Congress in 1970, and adjusted with the Patriot Act in 2002.

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By submitting this form, you consent to receive email from Wall Street Prep and agree to our terms of use and privacy policy. We’ll now move to a modeling exercise, which you can access by filling out the form below. Level up your career with the world’s most recognized private equity investing program. Such lenders may also charge substantial prepayment penalties, even should early prepayment be allowed. Below is an example of a financial model from CFI’s online valuation modeling courses.

Major investment firms provide an automatic service so that your cash doesn’t sit idle for long. A cash sweep moves your uninvested cash balance into an account or fund with the potential to earn a profit. 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. Companies therefore use the cash sweep feature to reduce their outstanding liabilities instead of letting their money sit idle in a cash account. Some brokerage accounts have similar features that enable investors to gain some additional return for unused cash. Sweep accounts are simple mechanisms that allow any money above or below a set threshold in a checking account to be swept into a better investment vehicle.

Cash sweep accounts provide a way for individuals to maximize their investment earnings by transferring excess cash into an interest-earning account or an investment fund. In a cash sweep account, excess cash is swept up, moved into a separate investment account, or invested into various investment funds. However, a cash sweep account only invests the money for short periods to ensure that excess cash does not sit idle in a borrower’s account. A cash sweep works by utilizing a borrower’s excess cash to pay down existing debt. To conduct a cash sweep, excess cash is swept up from a borrower’s account and applied towards any existing debt a borrower may have.

CFI is on a mission to enable anyone to be a great financial analyst and have a great career path. In order to help you advance your career, CFI has compiled many resources to assist you along the path. I started a sweep account several years ago, and I was not familiar with the practice at that time. Over time, the cumulative interest can provide a meaningful financial boost for the business, helping to offset other operating costs or contribute to growth. HDFC Bank Sweep-in Fixed Deposit Facility Among them, its Sweep-in FD is one of the most popular ones. With this facility, you can earn higher interest rates on your FD amount and also enjoy the liquidity and flexibility of savings accounts that you generally lack in a normal FD.

Cross-institutional sweeps are especially useful for companies seeking to optimize their returns while managing funds across various banking relationships. Collection agencies can access your bank account, but only after a court judgment. Your money will be deposited through a sweep of cash in your MFI brokerage account. Next, we’ll be assuming a full cash sweep – i.e. 100% of the excess cash goes towards repaying the principal balance. This is somewhat unrealistic, but we incorporate this into our exercise so that the effects of the cash sweep are more intuitive.