Which Is Incorrect About Compensating Balance Agreement
Since the store needs a balance of $20,000 for other expenses, the owner borrows US$40,000 from the LOC to purchase the inventory. Most customers pay in cash or credit card, so the LOC can usually be paid in the last week of the month. The conclusion of a countervailing balance agreement associated with a commercial mortgage can be significant and is very risky for the borrower and its contracting entities. The risk is that compensatory balances will give the bank the right to compensate. In the event of a mortgage default, it will be easy for the bank to freeze or set aside the agreed clearing balance. Once completed, this money is now limited and cannot be accessed or used. The limited liquidity held by the bank can be used to reduce the stock of credit. For example, a company has a $5 million line of credit in a bank. The credit agreement stipulates that the company maintains a clearing balance in a bank account of at least $250,000. If both parts of the agreement are billed, the loan is actually $4,750,000. The two most common types of clearing balances applied by banks are the average balance and the minimum amount. The average balance system is most often used in credit lines for commercial banks and is calculated on the average account balance managed over a period of time, usually over an average of 30 days. When insufficient balances are lower than the agreed average balance, the interest rate on the loan normally increases.
(b) Additional balances required – $120,000 to $70,000 USD – 50,000 USD (b)If Weathers becomes a regular customer of the State Bank and keeps its normal deposits at the bank, the additional down payment for the clearing balance will be reduced and costs reduced. As a general rule, a company must declare such a balance in the form of limited cash. It is cash that a company considers a specific objective, and therefore it is not accessible for regular professional use. One point is that a compensatory balance is not the same as limited cash. Clearing assets are the funds that a borrower must deposit with a bank to meet the terms of the commercial real estate credit agreement. Depending on the agreement, the deposit can be made on a current account, savings account or certificate of deposit. These are cash funds and the required balance is usually a percentage of the promised loan amount. The quantity is negotiable and can vary considerably.
A clearing balance is a minimum account balance that a borrower is willing to manage with a lender.