Listen to a Business English Dialogue About A compensating balance
Billy: Hey Mary, have you ever heard of a compensating balance in banking?
Mary: Hi Billy, yes, I have. It’s the minimum balance that a bank requires a borrower to maintain in their account as a condition for granting a loan.
Billy: That’s right, Mary. The compensating balance helps ensure that the bank earns interest on the borrower’s funds while they’re using the loan proceeds.
Mary: Exactly, Billy. It’s like a form of collateral for the loan, providing the bank with security in case the borrower defaults.
Billy: Yes, Mary. And sometimes, the compensating balance can be a significant portion of the loan amount, reducing the effective loan proceeds available to the borrower.
Mary: Right, Billy. Borrowers should carefully consider the impact of the compensating balance requirement on their cash flow and financing needs.
Billy: Absolutely, Mary. They should evaluate whether the benefits of the loan outweigh the costs associated with maintaining the compensating balance.
Mary: Yes, Billy. And it’s essential for borrowers to negotiate the terms of the compensating balance with the bank to ensure they’re manageable and reasonable.
Billy: Definitely, Mary. Being proactive in discussing the terms can help borrowers find a balance that meets their financial objectives.
Mary: That’s true, Billy. Thanks for discussing compensating balances with me. It’s an important aspect of banking and finance to understand.
Billy: No problem, Mary. If you have any more questions or want to discuss other financial topics, feel free to ask.
Mary: Will do, Billy. Thanks again, and have a great day!
Billy: You too, Mary!