Next up in our bank loan restrictions comes compensating balances. And it’s something nearly all banks use when loaning a business money for equipment financing.
A compensating balance is when a bank requires a business to keep a certain balance amount in an account with them. This balance amount is typically 80% of the equipment loan.
The key factor is this is it’s a required minimum balance, meaning the balance cannot fall under that 80% amount. In other words, it’s money that is technically yours, but it’s kind of not, because it’s locked up and you can’t use it.
In addition, it’s very likely this money will need to be in a typical business checking / business account that’s paying next to nothing. No bank is going to give you the special “36-month CD rate” on your compensating balance.
So here’s what you end up with: a big chunk of your money NOT working for you, that you cannot use either. Instead, it quietly sits there, just in case you decide to default.
This brings up a very valid point. If you can’t use the money in the account, whose money did you actually borrow? If you answered “it’s like I borrowed my own money” you’d be right. That’s exactly what it is, in fact.
Many companies don’t even realize this happens, because they often use their own bank for equipment financing. So they have money in the bank anyway. Even if they are aware of the compensating balance the loan officer may say “it’s no big deal – you already have your money with us anyway”.
But that’s not the point. The point is it’s money you cannot use. And honestly, money that you cannot use but also isn’t growing is pretty useless, and not a good business practice.
If you value financial flexibility and spending your money the way you wish, look for a lender who does not use compensating balances, like Crest Capital. We don’t care what you do with your money. After all, it’s yours, and you can spend it any way you like.
THAT’S Freedom!