An excess cash flow sweep is a credit agreement clause that directs part of a borrower’s surplus cash—after operating needs, capex, and permitted payments—to mandatory loan principal repayment.

How it works

Lenders define “excess cash flow” in the credit agreement: typically net income plus non-cash charges, minus maintenance capex, taxes, and scheduled debt service. If the result exceeds a negotiated cushion or grows year over year, a sweep percentage—often 50%–75%—must prepay the term loan within a set number of days after the annual or quarterly certification.

Sweeps appear in venture debt, growth credit, and leveraged buyout packages. They protect lenders when EBITDA improves but the borrower might otherwise pay dividends or hoard cash without de-levering. Some agreements step down sweep percentages once leverage ratios hit targets, or exempt proceeds earmarked for approved acquisitions.

Related but distinct: a cash sweep on acquisition debt may grab all cash at closing; excess cash flow sweeps operate periodically based on performance.

Why it matters

• Founders: Model sweeps in cash-flow forecasts; a profitable year can mean less cash for R&D hires or shareholder distributions than the income statement suggests.
• Investors: Credit terms including sweep mechanics affect runway extension trades and whether equity holders benefit from early debt paydown versus reinvestment.

Common mistake

Ignoring sweep triggers until year-end compliance. Finance teams should track covenant calculations quarterly so prepayment obligations are not a surprise wire.

Related ideas

See cash sweep, covenant, venture debt, and event of default.