Cash Sweep

What is a Cash Sweep?

A cash sweep refers to the use of excess cash to pay down debt. The concept of a cash sweep is quite simple – excess cash in a borrower’s account is converted into a debt payment at the end of each business day. By conducting a cash sweep, companies can reduce their outstanding debt using cash that would otherwise sit idle in their account.

Individuals can also take advantage of cash sweep accounts, which maximize investment earnings by transferring excess cash into interest-earning accounts or investment funds. In both cases, cash sweeps provide a way for borrowers to utilize their excess cash more effectively.

How It Works

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. Cash sweep accounts are used by companies as part of their cash management processes and by individuals to maximize their investment earnings. In both cases, cash sweeps involve excess cash that accumulates after necessary expenses have been accounted for.

For a corporation, excess cash refers to any remaining cash after operating expenses, and regular debt has been paid. Cash sweeps involve agreements between a borrower and their bank to sweep excess cash from their accounts periodically. Typically, cash sweeps occur at the end of each business day, and the excess cash is moved into a separate account and used to pay off existing debt.

For example, if a company has debt remaining from a line of credit, the daily cash sweep would automatically be converted into a debt payment. For individuals, cash sweep accounts can also help maximize investment earnings by transferring excess cash into interest-producing accounts or investment funds.

Cash Sweep Benefits

There are several reasons why corporations may choose to conduct a cash sweep. First, a cash sweep uses excess cash that would otherwise be sitting idle in a corporation’s account. By conducting a daily cash sweep, a corporation can efficiently apply its excess cash and reduce the interest resulting from its debt. By reducing outstanding debt, corporations are also in a more favorable position to refinance their debt due to the reduction in their outstanding balance.

In addition, paying down debt can reduce a company’s debt to equity ratio. When a company lowers its debt to equity ratio, it can project financial stability and improve its ability to raise future capital, both of which are important factors for investors and other stakeholders.

Cash Sweep Provisions

In some cases, a cash sweep may be required as part of a borrower’s loan agreement with a lender. To ensure loan repayment, a lender may insert a cash sweep provision into the loan agreement to ensure that a percentage of a borrower’s excess cash is used to prepay the loan. Cash sweep provisions are more likely to occur with borrowers that operate in volatile industries such as energy or commodities. In such a case, a lender would require the borrower to use a percentage of their excess cash to pay down the existing loan.

By reducing the outstanding loan balance, the cash sweep payments act as a buffer against other years where the borrower may incur lower revenues as a result of industry volatility. Cash sweep provisions can also be found in instances where a borrower wants to extend the length of the loan.

By inserting a cash sweep provision, a lender may agree to increase the term of the loan because the cash sweep provisions reduce the outstanding balance through prepayments, which naturally shortens the length of the loan.

Cash Sweep Accounts

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.

Cash sweeps are typically conducted daily, and at the end of the month, the individual receives an interest or dividend payment. Although the excess cash is moved out of the borrower’s account and into another investment, it is still readily accessible for the borrower should they choose to move into longer-term investments.

Therefore, cash sweep accounts should not be viewed as a long-term investment solution, but rather a means of earning short-term interest by investing excess cash that would otherwise be sitting idle in a borrower’s account.

Cash Sweep in Financial Modeling

A financial analyst will often build a cash sweep in financial modeling. For example, when building an LBO model, it may be necessary for the analyst to use Excel functions and formulas that automatically take all available cash and use it to repay debt.

Below is an example of a financial model from CFI’s online valuation modeling courses.

Other Resources

Thank you for reading CFI’s guide to Cash Sweep. You can learn more about cash flow analysis and money management by using these CFI resources:

• Free Cash Flow
• Three Financial Statements
• Cost of Debt
• Financial Modeling Guide
• See all commercial lending resources