What is a Credit Sweep?

A credit sweep is an arrangement between a business and its bank, where the bank automatically uses all excess funds in a deposit account to reduce the firm's outstanding line of credit. The amount of cash swept out of the deposit account is based on a threshold level that the business wants to maintain in the account; all funds above this baseline amount are used to pay down the debt. The bank offering this service may also offer the reverse service, where cash is shifted from the line of credit into the deposit account if the balance in the account drops below the threshold level.

Advantages of a Credit Sweep Arrangement

Credit sweeps are most useful for larger entities that have multiple bank accounts that are difficult to track manually on an ongoing basis, and which have high levels of balance variability. Using a credit sweep ensures that cash balances are maintained at minimum levels in deposit accounts, while also reducing the amount (and therefore the cost) of the line of credit. This can eliminate the daily analysis of accounts that a staff person would otherwise have to conduct to ensure that account levels and the line of credit balance are optimized.

Disadvantages of a Credit Sweep Arrangement

While credit sweeps can offer benefits like improving cash flow management and minimizing interest expenses, they also have several potential disadvantages, which include the following:

Bank fees. Some banks charge fees for implementing and managing credit sweep arrangements. These fees can include per-transaction charges, monthly maintenance costs, or even fees for modifying the sweep setup. If the savings on interest or returns from investments don’t exceed these fees, the arrangement may not be cost-effective.
Interest rate sensitivity. In periods of low interest rates, the savings from sweeping excess funds might not justify the effort and costs involved.
Lost investment options. By automatically paying down debt or transferring funds to low-risk accounts, businesses may miss out on opportunities to invest in higher-return initiatives or projects.
Risk of misaligned priorities. The automatic nature of credit sweeps might inadvertently prioritize debt repayment over other critical financial obligations, such as vendor payments or reinvestments in the business.

While credit sweep arrangements can help optimize cash management and reduce interest costs, their disadvantages need to be carefully evaluated.