A cash-sweep works by using a borrower`s excess cash to pay off existing debts. To make a cash-sweep, the excess cash is swept from a borrower`s account and is carried over all existing debts of a borrower. Cash scanning accounts are used by companies as part of their cash management processes and by individuals to maximize their investment income. In both cases, cash sweeps are surplus cash that accumulate after the necessary expenses have been accounted for. If the first calculations are done correctly, interest on money and returns on investments should yield a sufficient return, increasing the total value of the scanning account. Technically, banks use scanning accounts as a legal circumvention to prohibit the payment of interest for commercial control. By “sweeping” money overnight to an investment vehicle of any type, unused cash can be more effective in achieving a slightly higher return. Sweep vehicles are often linked to the money market, specifically to eurodollar sweeps and repo sweeps. In some cases, a cash sweep may be necessary as part of a borrower`s loan agreement with a lender. In order to ensure repayment of the loan, 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 for the advance of the loan.
Cash sweep provisions are more likely to appear in borrowers operating in volatile sectors such as energy or commodities. In this case, a lender would require the borrower to use a percentage of its excess money to repay the existing loan. Most credit sweepers also have the opposite arrangement, where if the funds in the account are weaker than the target balance, there will be a drop on the line of credit to achieve the goal. The “sweeping” part of a credit sweep is financial jargon; as in, the bank “swept” the balance into one account over another. The principal amount and interest related to Swing Line advances requested or considered to be claimed under this section are paid without deduction, deduction or counter-debt, in accordance with the terms of the sweeping agreement. A credit sweep is a cash management tool that is particularly beneficial for large companies that have multiple accounts and wide variability in day-to-day payments. If the balance of a deposit account is greater than a target balance, a credit scan account can be created to automatically transfer the excess funds to the account in order to pay off the outstanding loan. Eurodollar sweeps are transfers of legal funds to the bank`s offshore units, whereas they are essentially an accounting technique that allows banks to lend the funds in full without having to pay the required reserves normally required and without having to pay FDIC insurance (since the sweep is not insured). Essentially, the funds are only unsecured liabilities of the bank and, therefore, the highest interest rates are offered by the bank on day-to-day loans. Many banks and financial institutions offer a monitoring service for individuals and small entrepreneurs. It has also become part of the arsenal of services offered by credit card companies. There are many forms of scanning arrangements.
Commercial banks can afford more sophisticated arrangements, allowing them to benefit from more aggressive, generally more cost-effective strategies. Smaller entities can easily use a swipe account for convenience.