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Tips on How to Bag a Loan |
Is your company in the market for a loan? Keep in mind that many
bankers are willing to negotiate some of the terms of their loans in
order to get your business. Since the decline in home values and
commercial real estate has resulted in less related mortgage loans,
bankers are now seeking business borrowers.
You
might be able to swing a deal that's more advantageous to your
company's cash flow. It has to do with the "compensating deposit
balance" required on certain loans.
Bankers
often require that you keep some fixed dollar amount or percentage of
the face value of a loan in a deposit account. This helps the bank
offset some of the risk. But the compensating deposit balance can be
calculated in a couple of different ways. The exact
calculations can have a big impact on your available cash.
Even
if a bank's written policy states that the balances are figured using a
certain method, you can ask to have the terms changed in your favor. Of
course, the higher amount that your company agrees to hold as a
compensating balance actually raises the amount of interest you earn.
However, your company loses the all-important use of the cash.
Let's say your banker offers you a loan that calls for a $5,000 "daily
balance" requirement. That means that before the close of each business
day, you must have at least $5,000 in your account. In some cases,
bankers "hold" your funds so that they cannot be used accidentally.
Here's an
alternative strategy: Ask the banker to use
an
"average" compensating balance calculation instead. Under
this
calculation, your company doesn't have to scramble to meet the daily
balance requirement.
You
simply need to keep an average amount in the account during an
agreed-upon period, which is usually monthly. This method is better if
your company's cash flow fluctuates.
Reason: The
flexibility of an average
compensating balance softens the effect
of days when your cash demand is high but deposits aren't flowing in as
expected. All of your operating funds are available when you need them
most.
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