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 CASH SWEEP 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.

ADVANTAGE

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.
DISAVANTAGE

sweep accounts can be a great way to grow your investments over time, as long as the fees make sense.
Take the time to really familiarize yourself with how much you'll be paying in fees each year, and match
that against your expected returns. The last thing you want is to lose money because you don't fully
understand your fees.

CONCLUSION

Understanding Sweep Account

Using a sweep vehicle like a sweep fund works by providing the customer with the greatest amount of
interest with the minimum amount of personal intervention by transferring money at the end of the day
into a high-interest account. In a sweep program, a bank's computers analyze customer use of checkable
deposits and sweep funds into money market deposit accounts.

As of 2016, some brokerage accounts had similar features that enabled 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. Sweep accounts were needed historically
because federal banking regulations prohibited interest on checking accounts.

Sweep accounts, whether for business or personal use, provide a way to ensure money is not sitting idly
in a low-interest account when it could be earning higher interest rates in better liquid cash investment
vehicles. These investment vehicles that provide higher interest rates while still offering liquidity include
money market mutual funds, high-interest investment or savings accounts, and even short-term
certificates with 30-, 60- or 90-day maturities for known layovers in investments.

Businesses and individuals need to keep an eye on the costs of sweep accounts, as the benefit from
higher returns from investment vehicles outside the checking account can be offset by the fees charged
for the account. Many brokerages or banking institutions charge flat fees, while others charge a
percentage of the yield.

How sweeping is done

Companies can set up sweeps by giving their bank pre-arranged instructions, similar to how individuals
can set up recurring transfers between their accounts. This allows the bank to follow the same process
everyday. Remember that, even though the sweep is completed at the same time everyday, many
companies now do business across multiple time zones, and that can complicate the process even
further. With dozens of accounts and millions of dollars (a day, a week, a month, etc), there is a lot of
planning and coordination involved in sweeps.

Regardless of the balance being negative or positive, accounts are zeroed out, with all excess funds
swept to the top account controlled by head office.

End-of-day sweeping vs Intra-day:

End-of-day: Given the complexity of sweeping, it is traditionally done at the end of the day. This
approach is still favoured by the majority of banks, but it leaves organizations, especially very large ones,
open to a certain amount of opportunity loss, as their money could be swept multiple times a day. Using
the end-of-day approach means that by the time the money is swept, and moved across multiple
borders, it can be 24–72 hours. That is a long time to wait for a company looking to invest their money.

Intra-day: Many banks are switching to an ‘intra-day’ approach to sweeping, which means that the bank
can sweep the money on behalf of their client more than once a day. While this is certainly an
improvement on the end-of-day approach, many large corporations are looking for instant results.

Real-time: nanopay’s Liquid allows banks to provide their clients self service, real-time sweeps. This
means that any time a corporation wants to complete a sweep, they can, and they can do it without
relying on the bank to complete the task for them. This frees up a lot of cash for corporates and make
their jobs a whole lot faster!

Cash can be compared to inventories as it is also something of a raw material that the company needs to
do business. It is very often comfortable for companies to hold large quantities of idle cash for liquidity
purposes or so that they do not have to raise more capital at a short notice. The issue with holding too
much cash at hand is the cost of capital. In case the company can invest some of its cash into marketable
securities, it can reduce its cost of capital and gain return on their idle funds. The problem is that the
company cannot invest all cash into securities, as the transaction costs would rise too high. The larger
the company, though, the more minimal these transaction costs are in relation to the profit made from
investing in the securities.

Many companies use sweeping as a method of gaining profit on their cash balances. Cash sweeping
entails that the cash balances of the company are transferred into overnight money market deposit
accounts (MMDA’s) which pay an overnight interest rate (usually a swap rate). Other short-term
securities that companies can invest their liquid funds in are commercial papers, bonds, mutual funds,
corporate notes and mortgage-backed securities.

What Is Cash Sweeping?

Cash sweeping, or a sweep account, is a checking account that automatically transfers money to an
investment account once that checking account exceeds a certain amount of money.

Here's what that would look like. Say you open a sweep account at your bank and set the sweep number
at $2,000. Anytime your checking account exceeds $2,000, the bank would automatically transfer the
amount over $2,000 into an account with a higher interest rate.

The huge bonus is that you earn more money and grow your investments without having to do anything.
Rather than letting your excess cash idle in your accounts, you can be turning your money into more
money by consistently investing with a sweep account.

Of course, investment accounts come with fees. People who opt into sweep accounts need to be aware
that it's likely their investments will be charged fees. Some brokerages charge a flat fee, while others
charge a percentage. It's critical to be aware of your fees before you make any investments.

https://corporatefinanceinstitute.com/resources/knowledge/finance/cash-sweep/#:~:text=A%20cash
%20sweep%20works%20by,to%20pay%20down%20existing%20debt.&text=Typically%2C%20cash
%20sweeps%20occur%20at,to%20pay%20off%20existing%20debt.

https://investorjunkie.com/investing/cash-sweeping/

Cash can be compared to inventories as it is also something of a raw material that the

company needs to do business. It is very often comfortable for companies to hold large

quantities of idle cash for liquidity purposes or so that they do not have to raise more

capital at a short notice. The issue with holding too much cash at hand is the cost of

capital. In case the company can invest some of its cash into marketable securities, it

can reduce its cost of capital and gain return on their idle funds. The problem is that the

company cannot invest all cash into securities, as the transaction costs would rise too

high. The larger the company, though, the more minimal these transaction costs are in

relation to the profit made from investing in the securities. Many companies use

sweeping as a method of gaining profit on their cash balances. Cash sweeping entails

that the cash balances of the company are transferred into overnight money market

deposit accounts (MMDA’s) which pay an overnight interest rate (usually a swap rate).
Other short-term securities that companies can invest their liquid funds in are

commercial papers, bonds, mutual funds, corporate notes and mortgage-backed

securities. (Brealey;Myers;& Allen, 2006 pp 821-822)