Compensating Balance (Noun)
Meaning
A minimum credit balance that a bank may require a borrower to keep on deposit as a condition for granting a loan; a common requirement for establishing a line of credit at a bank; "the compensating balance increases the effective interest rate to the bank since the net amount loaned is reduced but the interest paid is unchanged".
Classification
Nouns denoting possession and transfer of possession.
Examples
- The company agreed to a compensating balance requirement of 20% with the bank in exchange for a line of credit to cover their cash flow needs.
- To obtain the $1 million loan, the business owner was required to maintain a compensating balance of 15% of the loan amount in her checking account.
- The bank offered a variable interest rate loan, but with a compensating balance requirement that added 2% to the effective interest rate.
- Before granting the loan, the bank required the borrower to open a checking account and maintain a compensating balance equal to 10% of the approved loan amount.
- The compensating balance requirement meant that the small business had to keep an additional $50,000 in its checking account as a condition for maintaining its existing line of credit.