A credit sweep is an arrangement that is made between a customer and the bank whereby the excess funds in a depository account are utilised to pay for short-term loans that were approved using a line of credit. Another term for credit sweep is an automated credit sweep. Usually, the customer in a credit sweep arrangement is a corporation.
Details On Credit Sweep
Essentially, a credit sweep is a tool for cash management that is availed by big corporations that own several bank accounts and go through different types of payments on a daily basis.
Likewise, there is an option for a credit sweep whereby if the total funds deposited in the account are smaller than the anticipated balance, a drawdown on the credit line will be initiated to meet the target.
What does the term “sweep” mean in Credit Sweep? This is basic financial terminology which implies that the bank moved or “swept” the balance of the account to another account.
How Do Banks Perform A Credit Sweep?
Banks perform credit sweeps in order to get around the technicality of paying interest for business checking.
The act of transferring or “sweeping” money from one account to another account, usually a type of investment, is seen to be a way of generating more return on idle money.
Usually, the banks use the money market as the vehicle for transferring the money. This practice is often called “Repo Sweeps” or “Eurodollar Sweeps”.
A bank can perform a credit sweep in different ways. For example, a commercial bank can utilise more complex credit sweep arrangements to be more aggressive in its strategy design. In this type of credit sweep, the returns are usually much higher.
Banks that are smaller in scale compared to a commercial bank may employ sweep account strategies for convenience purposes. Under this process, a bank can implement different types of services to support the credit sweep.