What Is a Credit Sweep?
A credit sweep is also known as an automated credit sweep. This term refers to an arrangement between a bank and a customer (usually a corporation) whereby all idle or excess funds in a deposit account are used to pay down short-term debt under a line of credit. The client usually sets a target balance that will determine how much of its funds will be used. This greatly helps a client reduce its costs paid through interest on outstanding debt.
Key Takeaways
- A credit sweep is an arrangement between a bank and customer whereby any excess funds in an account can be used to pay down the customer's debt.
- This type of arrangement is set up automatically and helps customers reduce their costs paid through interest on outstanding debt.
- Credit sweeps are offered by banks as a cash management tool to help customers manage their accounts.
- Banks often use sweep accounts to help customers earn interest on their idle cash.
Understanding a Credit Sweep
A credit sweep is a cash management tool that is especially beneficial to large corporations that have multiple accounts and great variability in payments from day-to-day. If the balance in a deposit account is above a target balance, a credit sweep account can be set up to automatically transfer the excess funds in the account to pay down the outstanding amount on a loan.
Most credit sweeps also have the opposite arrangement, whereby if the funds in the account are less than the target balance, there will be a drawdown on the line of credit to reach the target. The "sweep" part of a credit sweep is financial jargon; as in, the bank "swept" the remaining balance in one account to another.
Example of a Credit Sweep
Company ABC has a line of credit with Bank XYZ in the amount of $1 million. Currently, ABC is borrowing $300,000 of the $ 1 million, which needs to be repaid. ABC also has a cash deposit account with Bank XYZ that is used to make regular business payments or used for any other business purposes. Company ABC sets up a target balance that stipulates that any amount in the deposit account that is over $285,000 on any given day, can be used to pay down the outstanding $300,00 loan. During one week, on a Friday, the amount in the deposit account is $295,000, so Bank XYZ uses the additional $10,000 above the target balance to pay down $10,000 of the $300,000 borrowed amount.
Sweep Accounts in Banks
On a more technical level, banks use sweep accounts as a legal workaround on the prohibition of paying interest on business checking. By "sweeping" funds overnight to an investment vehicle of some sort, idle cash can be more effective in generating marginally more return. Sweep investment vehicles are often tied to the money market, or more specifically, "Eurodollar Sweeps" and "Repo Sweeps."
There are many forms of sweep arrangements. Commercial banks can afford more sophisticated arrangements, so they enjoy more aggressive strategies, which usually offer a higher rate of return. Smaller entities might use a sweep account simply out of convenience. As such, various levels of service are common when setting up a sweep arrangement.
FAQs
A credit sweep is also known as an automated credit sweep. This term refers to an arrangement between a bank and a customer (usually a corporation) whereby all idle or excess funds in a deposit account are used to pay down short-term debt under a line of credit.
What is an example of a sweep account? ›
Individual sweeps are typically used by brokerages to store client funds until the owner decides how to invest the money. For example, a sweep account might move excess cash to a money market fund, where it will earn greater returns than an ordinary checking account.
How does sweep in account works? ›
A sweep-in facility ensures that whenever funds in your Savings Account are running low for a purchase or transaction, the bank will transfer the deficit amount from your Fixed Deposit to your Savings Account without affecting your interest rate in your Fixed Deposit.
How does a sweep program work? ›
With a sweep account, any amount of funds that exceed a certain, pre-set amount are “swept” into a higher interest-earning account. These sweeps can happen at the end of the business day or on another, pre-determined schedule.
How do you sweep your credit? ›
The way a credit sweep works is the credit repair company asks you to pretend that you have been the victim of identity theft so that they can get the credit bureaus to remove accurate, valid negative information from your credit report.
What are the benefits of a credit sweep? ›
The advantage of a credit sweep arrangement is that it maximizes the interest earned on excess cash, while ensuring that sufficient funds are always available in the checking account for daily transactions.
Can I withdraw money from my sweep account? ›
To withdraw money from a sweep account, one can usually do so through their online banking account or by contacting their bank directly. The customer may be required to specify the amount they want to withdraw and the account they want the funds transferred.
What is the disadvantage of sweep in account? ›
Premature Withdrawal Penalties: One of the key disadvantages of Auto Sweep Accounts is the penalty imposed on early withdrawals from the linked Fixed Deposit (FD). This penalty can vary depending on the bank's policy but generally involves a reduction in the interest rate applicable to the FD.
Are sweep accounts good? ›
The primary advantage of maintaining a sweep account is the ability to earn a return on excess cash instead of letting it sit idle while also ensuring there's enough cash on hand to pay for operating expenses. Minimal work needed to maintain. The automation provided by sweep accounts makes the process simple.
Is there a risk for a sweep account? ›
Regular sweep accounts offered by banks make it easy to earn interest on money, typically with little risk. If funds are swept into a high yield savings account or money market account, for example, that cash isn't exposed to market volatility.
Sweeping payments allow you to send funds between two bank accounts in your name, (which are the main 9 FCA regulated banks within the U.K, also known as the CMA9)
What is a sweep transaction? ›
As the name implies, a sweep account 'sweeps' or transfers excess funds from one brokerage or bank account to another. Such accounts automatically transfer money exceeding a certain threshold limit to a higher interest-earning investment account. This transaction takes place at the end of every working day.
How do you make a sweep work? ›
They will insert their finger into the opening and gently 'stretch' it and 'sweep' their finger around the inside of the opening. This separates or 'strips' some of the membranes away from the wall of the womb. Sweeping of the membranes releases a hormone called prostaglandin which helps labour begin.
How much interest does a sweep account pay? ›
Bank Deposit Sweep Program Rates
| Cash Balance | Interest Rate 1 | Annual Percentage Yield (APY) 1 |
|---|
| $100,000 – $249,999 | 0.50% | 0.50% |
| $250,000 – $499,999 | 0.95% | 0.95% |
| $500,000 – $999,999 | 0.95% | 0.95% |
| $1,000,000 – $4,999,999 | 2.00% | 2.02% |
5 more rowsThe primary advantage of maintaining a sweep account is the ability to earn a return on excess cash instead of letting it sit idle while also ensuring there's enough cash on hand to pay for operating expenses. Minimal work needed to maintain. The automation provided by sweep accounts makes the process simple.
Do you make money in a sweep account? ›
Money in your sweep account that's waiting to be invested can still earn a solid yield. Gone are the days when cash was trash. Now, it's a valued asset that can earn 5% a year. That's why it's important to make sure the ready money in your brokerage account is earning a competitive yield.
What is the average return of a sweep account? ›
Bank Deposit Sweep Program Rates
| Cash Balance | Interest Rate 1 | Annual Percentage Yield (APY) 1 |
|---|
| $250,000 – $499,999 | 0.95% | 0.95% |
| $500,000 – $999,999 | 0.95% | 0.95% |
| $1,000,000 – $4,999,999 | 2.00% | 2.02% |
| $5,000,000 and above | 2.00% | 2.02% |
5 more rows