TRY A COMPENSATING BALANCE TO GET THE LOAN YOU NEED
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 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.
ALTHOUGH MOST LENDERS KNOW THE IDEA we just described, many don't recognize the term “compensating balance loan” by itself. The name has just never caught on with the mainstream banks. When approaching a lender about this type of loan, be prepared to describe the idea itself, in case the lender doesn't use the same words.
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 account. Compensating balances are typically 10% of the amount of the loan, as 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 just don't advertise it. Some bankers feel such loans are risky. If you're interested in getting such a loan, you should inquire at several banks for details. The basic rule of loan seeking applies here as well: if the first few banks turn you down, the next one might give you the loan you want.
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—like State Credit Union.
TIPS FOR GETTING A COMPENSATING BALANCE LOAN:
• Go to commercial banks and credit unions for such loans. Savings banks and Savings & Loans generally do not make compensating balance loans.
• To set up a compensating balance loan, your business MUST be established and have a business checking account at the bank where you plan to apply for the loan. Note: 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. If the lender issues a line of credit, it 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 regular loan, the money is in your business name. Either way, the result is the same—with any luck, you'll 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, but keep as large a balance as you can in your business checking account. The lender (and your credit rating) will be happy you did.
COMPENSATING BALANCE LOANS can be a way to fund a business 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 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.