Word: Compensating Balance
Part of Speech: Noun
Definition: A compensating balance is a minimum amount of money that a bank requires a borrower to keep in their account as a condition for getting a loan. This means that when someone takes out a loan, they might have to keep a certain amount of money in their bank account, which the bank uses to ensure it has some funds available.
Usage Instructions: - You would typically use "compensating balance" when discussing loans, banking, or financial agreements. - It is often mentioned in the context of borrowing money or applying for a line of credit.
Example Sentence: "When applying for a business loan, the bank required a compensating balance of $5,000 to be maintained in the account."
Advanced Usage: In more complex financial discussions, you might say, "The requirement of a compensating balance can significantly impact the effective interest rate, as the borrower is essentially paying interest on a reduced amount of funds available for use."
Word Variants: - Compensate (verb): To make up for something or to counterbalance. - Compensation (noun): Something given to make up for a loss or to balance an effect.
Different Meanings:In general terms outside of banking, "compensating" can refer to making up for something that is lacking or providing an equivalent for a loss.
Synonyms: - Minimum deposit - Required balance
Idioms and Phrasal Verbs: - There aren’t specific idioms or phrasal verbs that directly relate to "compensating balance," but you might hear phrases like "keeping funds on reserve," which conveys a similar idea of maintaining a certain amount of money in an account.
Summary: A compensating balance is an important concept in finance, especially when dealing with loans and credit. It can affect how much interest a borrower ultimately pays and represents a requirement that is significant in the banking relationship.