A credit sweep is also called automated credit scan. This term refers to an agreement between a bank and a client (usually an entity) that uses all unused or surplus funds in a deposit account to settle short-term debts as part of a line of credit. Typically, the customer sets a destination balance that determines the amount of resources used. This greatly helps a customer to reduce its costs, which are paid by interest on unpaid debts. Technically, banks use scanning accounts as a legal circumvention to prohibit the payment of interest for commercial control. By “sweeping” money overnight to an investment vehicle of any type, unused cash can be more effective in achieving a slightly higher return. Sweep vehicles are often linked to the money market, specifically to eurodollar sweeps and repo sweeps. There are many forms of scanning arrangements. Commercial banks can afford more sophisticated arrangements, allowing them to benefit from more aggressive, generally more cost-effective strategies. Smaller entities can easily use a swipe account for convenience. As a result, different levels of service are common when setting up a scanning device. Most credit sweepers also have the opposite arrangement, where if the funds in the account are weaker than the target balance, there will be a drop on the line of credit to achieve the goal.
The “sweeping” part of a credit sweep is financial jargon; as in, the bank “swept” the balance into one account over another. Simplify the way you move, manage and monitor your money using our secure online business banking tool. Credit sweeps are most useful for large companies with multiple bank accounts, difficult to track manually on an ongoing basis and with great variability in balances. The use of a credit sweep ensures that cash holdings are kept at a minimum level on deposit accounts, while reducing the amount (and therefore the cost) of the line of credit. A credit sweep is a cash management tool that is particularly beneficial for large companies that have multiple accounts and wide variability in day-to-day payments. If the balance of a deposit account is greater than a target balance, a credit scan account can be created to automatically transfer the excess funds to the account in order to pay off the outstanding loan. ABC Corporation has a line of credit with XYZ Bank amounting to $1 million. Currently, ABC borrows $300,000 of the $1 million to be repaid. ABC also has a cash deposit account with XYZ Bank, used for regular commercial purposes or used for other commercial purposes. ABC establishes a target balance that provides that any amount in the deposit account that exceeds $285,000 on a given day can be used to repay the outstanding credit of $300.00.
For one week, on a Friday, the deposit account amount is $295,000, allowing XYZ Bank to use the additional $10,000 above the target to pay $10,000 of the $300,000 borrowed amount. A credit sweep is an agreement between a company and its bank, in which the bank automatically uses all surplus funds in a deposit account to reduce the company`s current line of credit.