A cash sweep mainly refers to the usage of excess cash for paying debts. Basically, the excess cash in a borrower’s account is transformed into a debt repayment at the end of a working day. For startups and small businesses, sweeping cash is an effective method since companies tend to reduce their outstanding debt using idle cash in their bank accounts. For individuals, it is a method of maximizing investment earnings by transferring the excess amount into investments or interest-earning accounts.
Thus, a cash sweep is an effective way for borrowers to utilize excess cash efficiently and effectively. In the world of iGaming, sweep cash has been useful for large establishments such as captaingambling.com, to manage user revenues and debts in a better way. Especially, since online casinos deal with a large volume of cash, involving multiple transactions that involve payments and withdrawals.
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How Does Cash Sweep Work?
For conducting a cash sweep, excess cash from a borrower’s account is swept up and applied toward a pending debt. Companies use this method as a part of the cash management process whereas individuals use this method to maximize their earnings from investments. For corporations, excess cash refers to any remaining money after omitting operation costs, and regular debts. Cash sweeps undergo an agreement between borrowers and their banks to withdraw excess money from their accounts periodically. Usually, at the end of each business day, a cash sweep takes place where the excess amount is moved into a separate account altogether for paying off other debts.
Benefits of Cash Sweep
There are multiple reasons why corporations willingly opt for cash sweeps. The main reason is that cash sweep uses the excess spare amount that is ideally sitting unused in the account. Conducting daily cash sweeps helps corporations apply their excess cash efficiently and reduces the interest rates of such debts which helps in the long run. While young business leaders have often been reeling under stress and pressure to restructure their debts and expenditure, Sweep cash is an easy way to manage finances better. This helps in refinancing debts since there is a reduction in the outstanding balance. Additionally, paying off debts helps companies reduce their debt-to-equity ratio too which in turn projects financial stability and the ability for raising future capital.
Provisions for Cash Sweep
In many cases, cash sweeps are an existing component of the loan agreement between a borrower and a lender. For loan repayment, lenders usually insert a provision for cash sweep. This is usually seen across volatile industries such as commodities or energy. For such cases, lenders require the borrower to decide upon a percentage of their excess cash for repayment. This in turn reduces the loan balance and cash sweeps act as buffers against other years where borrowers might incur low or no revenues. Another benefit of cash sweeps is that borrowers can lengthen the term of the loan.
Cash Sweep Accounts
For individuals, cash sweep accounts provide a method of maximizing investment earnings by transferring excess cash into an investment fund or interest-earning account. For cash sweep accounts, the excess cash is moved into a different investment account or directly invested into funds. Cash sweep accounts invest for a short duration to ensure that excess cash is not sitting idly in a borrower’s account. Cash sweeps occur on a daily basis along with the end of the month when the individual receives a dividend payment or an interest. If borrowers choose to opt for longer-term investments, the excess cash is accessible and available. Thus, cash sweeps are ideally short-term interests.
Conclusion
For startups and small businesses, a cash sweep is an ideal solution to utilize funds. However, investments must essentially prioritize liquidity over return and capital preservation. A borrower must always choose to deal with banks that offer two-way sweep services. For a business that is majorly cyclical, a two-way sweep offers a combination of credit sweep and investment sweep for return maximization on the working capital. This in turn also helps businesses to focus on higher-rate loans first. Withdrawing money from lower-rate investment accounts is also beneficial when funds are required.
