A credit sweep is a useful financial tool that is available from many banking institutions. The sweep usually works by establishing a process whereby any idle funds in a deposit account are utilized to pay down any existing line of credit that the customer may currently have open with the bank. Sometimes referred to as a sweep account, this arrangement allows the customer to constantly be settling debt whenever there are extra funds available to do so, thus protecting the integrity of the credit rating.
With a credit sweep, the deposit account of the debtor is arranged so that whenever the account balance exceeds a certain minimum amount, those extra funds are moved or swept over to the balance of the line of credit. This minimum amount is often referred to as the target balance. The extra funds are applied as a payment on the line of credit, a process that can not only help reduce the amount of interest due on the credit line, but also prevent the debtor from missing regularly scheduled payments on the outstanding balance of that line of credit.
For example, a small business may establish this type of automated credit sweep by setting up a target balance for the company’s operating account. That figure is set at a level that allows the business to always have enough money on hand to pay its vendors and handle various operating expenses, but is less than the total amount of revenue received in any given calendar month. As the deposits are made to the account and the balance exceeds this target figure, the bank automatically removes a portion of those extra funds, applies them to the balance on the line of credit, and notifies the customer of the transaction. If the customer has arranged for more than one credit sweep to occur during each calendar month, then the process will repeat each time the balance in the sweep account exceeds the minimum requirement.
The concept of a credit sweep is relatively common throughout the world. Large corporations sometimes employ this strategy as a way of using a line of credit for financing a project that is expected to become revenue generating within a short period of time. Depending on how the sweep is structured, the company has to bear the burden of paying on the line of credit from its pre-existing income sources for only a month or so before the proceeds from the new project take over and eventually retire the expense. In the interim, the company is making timely payments on the line of credit and thus helping to maintain its ability to draw on the credit line when and as needed.
