What is a compensating balance?
A)reclassification of a cash amount that is restricted from use in the current operating cycle
B)negative cash balance that occurs when a company writes a check in an amount that exceeds the account balance
C)short-term liquid investment with original maturity of three months or less
D)minimum cash balance required to be maintained by a credit agreement

Question

Quizplus · Accepted Answer

A compensating balance is a minimum cash balance that a borrower is required to maintain by a lender as a condition for providing a credit agreement. This is a way for lenders to ensure that a borrower has enough cash to pay back the loan. Compensating balances are usually a percentage of the loan amount and cannot be used by the borrower.

What Is a Compensating Balance