What is the role of cash sweeps in credit facilities?

• A. They reduce unused availability.
• B. Automatic application of excess cash to debt service or principal reduction.
• C. They increase discretionary cash for dividends.
• D. They delay debt service payments.

Answer: (B)

Cash sweeps automate the use of any excess cash generated by the business to pay down outstanding debt, typically directing it to debt service or principal reduction. This creates a disciplined deleveraging path: when cash flow exceeds what is needed for operations and scheduled payments, the surplus is automatically applied to reduce the loan balance. Lenders favor cash sweeps because they lower credit risk by shortening the period of interest accrual and improving leverage, while borrowers benefit from a clearer route to faster payoff and potentially better financing terms in the future. The other options don’t fit: cash sweeps don’t purposefully increase discretionary cash for dividends, they don’t delay debt service, and their main function is to convert excess cash into debt repayment rather than maintaining cash for other uses.