compensating balance(redirected from Compensating Balances)
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Money from a loan that a borrower keeps in an account with a lender providing some surety that the lender will be repaid. A compensating balance is especially common with corporate loans. It increases the cost of capital to the borrower because he/she is paying interest on more money than he/she is permitted to use.
The funds that a corporate borrower is required to keep on deposit in a financial institution in order to satisfy the terms of a loan agreement. The deposit may be in a checking account, savings account, or certificate of deposit, depending on the nature of the agreement. The net effect of a compensating balance requirement is an increase in the effective cost of the loan because the borrower is unable to use all the funds on which interest is paid.