A cash sweep is a financial mechanism where excess cash generated by a company is automatically used to pay down outstanding debt instead of being held as free cash flow. This is often a condition in loan agreements or credit facilities, ensuring lenders receive early repayments when a business generates surplus revenue. Cash sweeps help reduce interest expenses and overall debt obligations.
Why do lenders require a cash sweep?
Lenders use a cash sweep to reduce credit risk by ensuring that extra cash is used to pay off debt, lowering the loan balance faster.
How does a cash sweep impact a company’s cash flow?
It limits the company’s ability to reinvest profits or distribute dividends, as excess cash is automatically redirected to debt repayment.
Is a cash sweep beneficial for businesses?
Yes, it helps reduce interest costs and speeds up debt repayment, but it can also restrict liquidity for business expansion or operational flexibility.
What types of businesses commonly use cash sweep provisions?
Cash sweeps are often found in leveraged buyouts (LBOs), private equity deals, and companies with structured debt financing to ensure faster debt reduction.
Or want to know more about pre-seed funding?
