Posted in Finance, Accounting and Economics Terms, Total Reads: 270
Definition: Credit Sweep
Credit Sweep is a service offered by financial institutions. Under credit sweep, banking institutions make a contract with the client to utilize idle or excess funds in deposit account in paying down borrowings under any existing line of credit customer has with the bank. First, the target balance is determined in consultation with the customer.
Target balance is the specified amount of money that should be in the deposit account at any point of time. Any balance above this target balance is used to pay down a line of credit. Whenever balance in the deposit account exceeds the target balance, it is transferred to pay down a line of credit automatically. Credit sweep helps in reducing the interest payment outstanding on the line of credit and also in not missing regular debt payments.
Some financial institutions also offer another kind of credit sweep service in which excess funds in the deposit account is used to invest in financial market like money market or CD which are easily liquidated. They also have opposite arrangement too in which if balance in the deposit account falls below target balance, investment in the financial market is liquidated and cash is deposited back into the deposit account.
Credit sweep is used by large corporations which have high fluctuations in a day to day balance in deposit account and also have high line of credit.
Any corporation establishes operating account in the bank and decides a target balance which takes care of daily operational expenditure. Any funds above this target balance is used by bank for the debt payment and the transaction is notified to the company.