| A compensating balance, sometimes called an | | | | maintained in a checking account. The account |
| offsetting balance, is an amount of money that a | | | | balance includes the security for the loan. If the |
| bank and borrower agree to keep in the borrower's | | | | borrower fails to repay the loan, the bank can take |
| bank account as a condition for the bank giving the | | | | the money from the checking account. |
| borrower a loan. | | | | Not all banks offer compensating balance loans. Many |
| This type of loan can be used for a small business or | | | | do offer them, but they just don't advertise that |
| real estate investment as an alternative to traditional | | | | they do. Some bankers see these loans as risky. |
| types of bank loans. Borrowers who haven't been | | | | If you're interested in getting a compensating balance |
| able to get a loan through other methods might have | | | | loan, you should do the same thing you would do |
| better success applying for a compensating balance | | | | when applying for any type of loan, namely: inquire at |
| loan. | | | | several banks for information. Commercial banks and |
| Compensating balances are typically 10% of the | | | | credit unions are usually the best places to go for |
| amount of the loan For example, if you borrow | | | | compensating balance loans. (You can often recognize |
| $100,000 and the bank requires you to keep $10,000 | | | | a commercial bank because it will have "N.A." at the |
| on deposit, that loan can be referred to as a | | | | end of their names, such as "Citibank N.A.") |
| compensating balance loan. Banks around the world | | | | If the banker doesn't immediately know what type |
| have used this kind of financing arrangement for | | | | of loan you're talking about, tell the banker you're |
| decades, but not all lenders are familiar with the | | | | talking about a loan based on maintaining an |
| name or with the concept of the compensating | | | | offsetting balance to secure the loan. When the |
| balance loan. | | | | lender recognizes the concept they may be willing to |
| The compensating balance amount is often | | | | offer you a compensating balance loan. |