Cash sweep

A cash sweep changes the practical experience of running a business under an acquisition loan more than most other covenants do, because it directly touches money the owner might otherwise have treated as available — a strong quarter’s surplus cash does not automatically become a distribution or a reinvestment fund if the loan agreement sweeps it toward principal first.

Why a lender asks for one

A lender that has taken on more risk than a standard fully secured term loan — because the deal is more highly leveraged, or because a subordinated or mezzanine lender is also involved — often wants the debt to come down faster than the scheduled instalments alone would achieve, using cash the business is actually generating rather than relying purely on projections made at closing.

What is typically negotiable

• How “excess cash” is defined, and what operating reserve is carved out and protected before any sweep applies
• Whether the sweep applies to all lenders in a multi-lender structure or only to the one requiring it
• Whether the sweep percentage steps down, or ends entirely, once specific financial milestones are met

What buyers commonly miss

A buyer modelling post-closing cash flow can plan around distributions or reinvestment that a cash sweep provision quietly forecloses, simply because the sweep clause was read as routine boilerplate rather than as a real constraint on how surplus cash can actually be used during the years it applies.