Listen to a Business English Dialogue About Compensatory balance
Audrey: Hey Madelyn, have you ever heard of compensatory balance?
Madelyn: No, what is it?
Audrey: It’s when a bank requires a borrower to keep a minimum amount of money in their account as a condition for granting a loan.
Madelyn: Oh, I see. So, it’s like a form of collateral to ensure the borrower can meet their obligations.
Audrey: Exactly. It helps reduce the risk for the bank because if the borrower defaults on the loan, the bank can use the compensatory balance to cover some of the losses.
Madelyn: That makes sense. But wouldn’t it tie up the borrower’s funds and limit their ability to use the money elsewhere?
Audrey: Yes, it can restrict their liquidity, which is something borrowers need to consider before agreeing to a loan with compensatory balance requirements.
Madelyn: I guess it’s a trade-off between getting the loan and having access to all of their funds.
Audrey: Right. Some borrowers might prefer other types of collateral or loan arrangements that don’t involve compensatory balances.
Madelyn: Are compensatory balances common in business loans?
Audrey: Yes, especially for smaller businesses or those with less established credit histories.
Madelyn: I see. It’s important for businesses to understand all the terms and conditions before agreeing to any loan arrangement.
Audrey: Definitely. That way, they can make informed decisions that are in the best interest of their business’s financial health.
