What is the difference between zero-balancing and target balancing?

Both move cash physically between participating accounts and a header account at the end of each day. Zero-balancing sweeps every account to nil, so a subsidiary's account holds nothing overnight. Target balancing sweeps to a set amount, leaving each subsidiary a working balance and moving only the excess or the shortfall. The intercompany loans arise in the same way; target balancing simply leaves a little more cash where it was earned.

Are zero-balancing sweeps intercompany loans?

Yes. Money swept from a subsidiary to the header account is lent by the subsidiary to the header company, and money sent down to cover a deficit is lent the other way. The balances need documenting, may need to carry interest, and appear in each company's own accounts as receivables or payables, though they eliminate in the consolidated accounts.

What happens to a cash pool if a subsidiary goes into liquidation?

Its account leaves the structure, and the balance in the sweep ledger becomes a claim in the liquidation. If the header company owes the subsidiary, the liquidator can demand payment. If the subsidiary owes the header company, the header is an unsecured creditor, unless its claim is secured, and shares in whatever is left; where the pool agreement subordinates it to the bank, it ranks behind the bank. Recent sweeps that reduced the subsidiary's debt to the header may also be open to challenge under each market's rules on preferences.

How does a zero balance account work day to day?

During the day the subsidiary receives and makes payments as normal, and the account may go overdrawn within an intraday limit the bank sets. After the cut-off, the bank calculates each account's closing balance and moves it to or from the header, so every participating account starts the next day at nil. The bank reports each transfer, and group treasury records the resulting balances between the companies.

// WORKED EXAMPLEWHERE THE RISK SITS

Zero-Balancing: the Intercompany Loans a Sweep Creates

The bank sees one balance. The companies owe each other the rest.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-07

// THE SHORT ANSWER

Zero-balancing runs a group on a single bank balance by moving its cash for real. At the end of each day the bank empties every participating account into a header account, or tops an overdrawn account back up from it, so each subsidiary starts the next morning at nil. For the bank this is simple: its end-of-day exposure is one account. For a lender reading the group it is not, because every sweep is a loan between two companies, and over a year the sweeps leave balances that are debts in law, recoverable by a liquidator and capable of tax consequences.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

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// 01 — WHAT THE SWEEP DOES AND WHY GROUPS USE IT

A group whose companies bank separately has surpluses in some accounts and overdrafts in others, and pays for the gap. Zero-balancing closes it by concentrating the cash. Each participating account, usually at the same bank and in the same currency, is linked to a header account held by the parent or a group treasury company. After the day's payments, the bank moves each credit balance up to the header and covers each debit balance from it. A variant, target balancing, sweeps to a set balance rather than to nil, so that a subsidiary keeps a working float.

The group gains one balance to manage and invest, one overdraft limit on the header in place of several, and a daily view of where its cash came from. The bank gains a simpler position: at the end of each day it faces the header balance alone.

// 02 — WHAT EACH SWEEP CREATES

A sweep is a transfer of money from one company to another, and a company does not give its money away. When a subsidiary's surplus goes up to the header, the subsidiary has lent it to the header company. When the header funds a subsidiary's deficit, the header company has lent to the subsidiary. The sweeps net off day by day in a ledger, and at any date each subsidiary is either owed money by the header company or owes it money.

Those balances need what any loan needs. A cash pooling agreement sets the interest, repayment on demand and what happens when a company leaves the group or fails. Where the companies are in different countries, the interest has to stand up as an arm's-length rate under transfer pricing rules. The directors of a subsidiary whose cash is lent upward to its parent have to judge that it is in their own company's interests, the corporate benefit question. And if a participant fails, its liquidator treats the balance as a debt like any other: a claim to collect if the header owes it, a debt to rank if it owes the header, and possibly a voidable preference if it repaid the header in the months before it failed. The look-back periods and defences differ between the three markets, and Australia and the UK both reach further back where the creditor is a related or connected company.

// 03 — THE EXAMPLE

A seed and grain merchant group, constructed for this page, runs its three trading companies on a zero-balancing structure with the header account in the holding company. At the year end the sweep ledger shows:

Grain trading company net swept up owed by header company 3.1m

Seed-cleaning company net funded owes header company 2.4m

Transport company net funded owes header company 0.9m

Header account at the bank 3.1 − 2.4 − 0.9 = −0.2m overdrawn

Balances between the companies 3.1 + 2.4 + 0.9 = 6.4m

The bank sees an overdraft of US$200,000. The companies owe each other US$6.4m. Two things can go wrong with that, and they run in opposite directions.

First, the transport company loses its main haulage contract and goes into liquidation, paying unsecured creditors 25 cents in the dollar, a rate that is the example's. The holding company recovers US$225,000 of its US$900,000. Worse, in its last three months the transport company's receipts swept US$400,000 up to the header, reducing what it owed from US$1.3m. If its liquidator recovers that as a preference, the holding company pays it back and claims for US$1.3m instead, recovering US$325,000 and losing US$975,000 in all.

Second, the grain trading company fails on a trading loss. Its liquidator demands the US$3.1m the holding company owes it. The holding company does not have it: the cash went into the seed plant's stock and the transport company's trucks, and the header account is overdrawn. The sweep that looked like the group's own money moving around has become a creditor's claim on the holding company.

// 04 — HOW IT DIFFERS FROM NOTIONAL POOLING

In notional pooling nothing moves. Each company keeps its balance, interest is calculated on the combined figure, and the bank relies on cross-guarantees and set-off because it still lends to the overdrawn companies. Zero-balancing reverses the trade: the money moves, the loans between the companies appear, and the bank's own position collapses into one balance. The Basel Committee recognises the difference in its leverage ratio rules, which apply to the largest UK banks and to Australian banks using their own credit risk models: a physical settlement that extinguishes the balances into a single one can be the bank's starting point, unless the bank could be held liable for a participant's failure.

The name also invites confusion with a cash sweep in a facility agreement, which is a requirement to prepay the loan out of surplus cash flow. That is a lender's repayment term; zero-balancing is a treasury service the bank provides.

DEFINED IN ONE PARAGRAPH → · NOTIONAL POOLING, WORKED → · RELATED-PARTY TRANSACTIONS →

// 05 — WHERE IT DECIDES A FILE

Consolidated accounts eliminate the balances between group companies, so a lender that reads only the group figures does not see them. The credit officer reads the sweep ledger or each company's own accounts, and asks four things. Which companies are in the structure, and are they all guarantors? A sweep that funds a company outside the guarantor group sends cash to a company the bank has no claim on. Is there a pooling agreement, and are the balances subordinated to the bank where the bank needs them to be? What happens when a company is sold, since its balance must be settled on the way out? And is a subsidiary that has lent its cash upward also giving an upstream guarantee of the parent's debt, so that it is exposed to the parent twice?

UPSTREAM GUARANTEE → · VOIDABLE PREFERENCE → · THE EXAM HALL · TRANSACTION BANKING →

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

Basel Committee on Banking Supervision, Basel Framework, LEV30 Exposure measurement — FAQ 1 to LEV30.1 — Physical settlement that transfers balances into a single account and extinguishes them is distinguished from netting, and the single balance can be the starting point for the leverage exposure unless the bank could be liable for participants' non-performance — section 04.

// QUESTIONS PEOPLE ASK

What is the difference between zero-balancing and target balancing?: Both move cash physically between participating accounts and a header account at the end of each day. Zero-balancing sweeps every account to nil, so a subsidiary's account holds nothing overnight. Target balancing sweeps to a set amount, leaving each subsidiary a working balance and moving only the excess or the shortfall. The intercompany loans arise in the same way; target balancing simply leaves a little more cash where it was earned.
Are zero-balancing sweeps intercompany loans?: Yes. Money swept from a subsidiary to the header account is lent by the subsidiary to the header company, and money sent down to cover a deficit is lent the other way. The balances need documenting, may need to carry interest, and appear in each company's own accounts as receivables or payables, though they eliminate in the consolidated accounts.
What happens to a cash pool if a subsidiary goes into liquidation?: Its account leaves the structure, and the balance in the sweep ledger becomes a claim in the liquidation. If the header company owes the subsidiary, the liquidator can demand payment. If the subsidiary owes the header company, the header is an unsecured creditor, unless its claim is secured, and shares in whatever is left; where the pool agreement subordinates it to the bank, it ranks behind the bank. Recent sweeps that reduced the subsidiary's debt to the header may also be open to challenge under each market's rules on preferences.
How does a zero balance account work day to day?: During the day the subsidiary receives and makes payments as normal, and the account may go overdrawn within an intraday limit the bank sets. After the cut-off, the bank calculates each account's closing balance and moves it to or from the header, so every participating account starts the next day at nil. The bank reports each transfer, and group treasury records the resulting balances between the companies.

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THE NUMBER · THE BANK · FUNDING AND LIQUIDITY

A bank holds US$3bn of assets it could sell within days at little loss. In a severe stress, it estimates US$2.4bn of its funding would leave within 30 days.

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3 MORE ON THE BANK · FUNDING AND LIQUIDITY →WHERE DO YOU READ FROM? THE PLACEMENT →

THE GLOSSARYIN ONE PARAGRAPHZero-balancing (cash concentration) What is zero-balancing, and what does it create between group companies?