What Is Cash Sweep? - Definition From Divestopedia

What Does Cash Sweep Mean?

A cash sweep is the use of a company's excess cash to pay outstanding debts ahead of the scheduled payment date instead of giving it to their investors or shareholders.

This process helps a company to minimize risk and liability as well as pay its debt at a faster rate than what is expected or agreed upon. Companies therefore use the cash sweep feature to reduce their outstanding liabilities instead of letting their money sit idle in a cash account.

Cash sweep accounts are also used by individuals who want to keep their money invested on a daily basis. A cash sweep can automatically “sweep” any excess money in their cash account to a mutual fund or other investment that they choose. The vast majority of banks, investment companies, mutual fund companies and other financial institutions offer this service as a courtesy free of charge.

The amount of cash that is “swept” using this feature is the balance that remains after all other business or personal financial obligations have been satisfied. For a corporation, this means the amount of money that is left after all regular debt payments and operational expenses have been taken care of.

For individuals, this usually means the amount of money that is left after all personal expenses and regular bill payments have been made. In many cases, a cash sweep fund is a money market mutual fund or slush fund. For banks, it can be either a checking or savings account for either an individual or a business.

Some banks offer an overnight Treasury sweep, where excess cash in the sweep account is “swept” into government bond holdings to earn interest all night and then is transferred back to the cash account at the beginning of the next business day.