Cash Sweep Meaning
Cash Sweep or Initial Cash Sweep is an automatic bank process when the extra cash of the company is used to pay the pending debts in advance or before the scheduled date rather than paying the shareholders and investors.
There is no doubt in saying that the business industry is growing day by day. There are many things that a company should do to make sure that everything is functioning properly. Though a company needs to do a lot of things one of the most important things is cash sweep. So if you have ever heard of this term before, but you don’t have specific knowledge regarding it, then this article is very beneficial for you. In this article, you will get to know about cash sweeps and some frequently asked questions will also be mentioned. So if you are curious to know more, then keep reading this article.
It is very important for any business to stay free from liability and this process supports keeping the company at less risk and reduces the liability. Apart from this, it is also very helpful in clearing the debts at a much faster rate. This is the main reason why the cash sweep is used by many companies to make their company function properly. In simple words, is the clearance of the debts before the scheduled date with the extra money left in the company. In this process, the extra money of the company is transferred to the deposit account from an investment account.
It is like an automatic process, which is done to reduce the risk of incurring a higher interest rate from the debt. The helpful thing about this is that it can be done through or to one bank account to different bank accounts and you can also do this inside the same banks. Along with this, all the collected funds in the bank account are sent to customers as per their specifications and cash sweep happens only once a day. To calculate the cash sweep, a common formula is used, which is:
Cash at Hand (Total) – Minimum Cash Balance for Operations + Debt Service Cash Flow = Cash Sweep
To understand it more clearly, you can make a balance sheet by yourself as it will help you understand the calculations properly.
One of the best advantages of cash sweep is that it helps in eliminating the characteristic of personal intervention. Being an automated process saves the time and effort of the business owner as he doesn’t have to make daily decisions about the company’s’ cash flow direction. If you are an individual, then you can use cash sweeps as an automation tool for investments. So this was some information regarding cash sweeps. Cash sweeps provide a lot of benefits to the borrowers and help in many things. With the rise in competition, sweep cash is very process for any company to keep their debts clear. I hope this article will solve some of your doubts and queries and you will get some helpful information.