Cash sweep

Definition

A loan term that sends surplus cash to the lender before the owner sees it.

Why It Matters

A buyer underwrites a deal on the cash left after debt service and then discovers the loan claims a share of that too, usually a percentage of excess cash flow measured once a year. It changes what the business is worth to you without changing what it earns: the same company, the same payments, and less of the surplus reaching your pocket until the balance is gone. Read the definition of excess cash flow in the credit agreement rather than assuming it, because the arithmetic behind it decides whether the sweep bites in a good year or every year.

In numbers: A 50% sweep on $200,000 of excess cash flow sends $100,000 to the lender and leaves $100,000 for the owner, which is a real reduction in what the year returned.