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

The main disadvantage of a credit sweep is the related service fee charged by the bank. This makes the arrangement not worthwhile for a smaller business, which usually has a simple financing structure that it can easily monitor without any help from the bank.