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COMPENSATING BALANCE LOANS FOR BUSINESS/REAL ESTATE

Written by: Tyler Hicks

Article Overview: Explains what a compensating balance loan is and how it can be used as a convenient way to get a loan for a business or a real estate project.

COMPENSATING BALANCE LOANS FOR BUSINESS/REAL ESTATE

COMPENSATING BALANCE LOANS FOR BUSINESS/REAL ESTATE

PART ONE

A COMPENSATING BALANCE, sometimes called an offsetting balance, is an amount of money that a bank and borrower agree to keep in the borrower's bank account as a condition for the bank giving the borrower a loan.

For example, if you borrow $100,000 and the bank requires you to keep $10,000 on deposit, that's a compensating balance loan. Banks around the world have used compensating balance loans for decades.

The compensating balance amount is often maintained in a checking account. If the borrower
fails to repay the loan, the bank can take the money from the checking account. Compensating balances are typically 10% of the amount of the loan, as shown in the above example. Some banks will give a customer a line of credit based on the customer keeping a compensating balance in their account.

Not all banks offer compensating balance loans. Many do offer them, however, but they just
don't advertise it. Some bankers believe that these loans are risky for them to make. If you're
interested in getting a compensating balance loan, you should inquire at several banks for details.
If the bank tells you they're not familiar with this type of loan, try giving them a definition like
the one above and mention an "offsetting balance." Once they recognize the concept they may be willing to offer a compensating balance loan.

To get this type of loan, your best bet is to go to commercial banks or credit unions. Commercial
banks usually have the letters “N.A.” at the end of their names—for example, “Century Bank
NA.” Credit unions typically have the words “Credit Union” in their names.

PART TWO

A COMPENSATING BALANCE LOAN, sometimes shortened to “balances” or “offsetting balance,” can help you multiply your borrowing power.

Note that:

• Most compensating balance loans are made by commercial banks and credit unions. Savings banks and Savings & Loan Associations normally do not make such loans.

• To establish a compensating balance loan, your business MUST be established and have a Business Checking Account at the bank where you plan to get the loan. Note that NO INTEREST is paid on your compensating balance Business Checking Account.

• The larger your balance in your Business Checking Account, the easier it is for you to get a compensating balance loan from your bank.

• Some banks will use a Line of Credit as the loan for your compensating balance. Your Line of Credit gives you the same cash-on-hand money that a loan would, except that the money is in the bank’s name until you use it. With a loan, the money is in your business name. Either way, the result is the same—with any luck, you get the money you need.

• Keep a good record with your business bank—that is, don’t write checks on uncollected funds; don’t overdraw your account if you can avoid it; keep as large a balance as you can in your Business Checking Account.

COMPENSATING BALANCE LOANS can be a way to business success during different phases of a business's growth. Whether you need $100,000, $1-million, or $5-million for your business, the compensating balance loan can be your way to a solvent business that has all the cash it needs to build your success. So start looking now to see if a nearby commercial bank, or credit union, will give you a compensating balance loan.

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Article Tags: amount of money, best bet, borrowing power, business real estate, century bank, checking account, commercial banks, compensating balance, compensating balances, credit unions, decades, loan associations, loans, savings banks, savings loan



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