Compensating Balance Loan Calculator
Enter the cash you need to use and the lender’s terms to find the face amount that leaves that cash available. The estimate also shows the restricted deposit, interest cost, and annualized borrowing cost.
Required loan face amount$125,000.00
- Total required bank balance
- $25,000.00
- Additional cash restricted
- $25,000.00
- Loan interest charge
- $2,500.00
- Total financing cost
- $2,500.00
- Effective rate for the term
- 0.03%
- Effective annual rate
- 0.1%
- Gross amount due at maturity
- $127,500.00
Interest is simple and based on the selected 360- or 365-day year.
The existing balance counts only if it would have remained at the lender without this loan.
How to use this calculator
- Enter the cash that must remain usable after all deductions and restrictions at funding.
- Enter the note rate, term in days, and the 360-day or 365-day basis stated in the loan documents.
- Enter the required compensating-balance percentage and any qualifying balance already held at the lender.
- Add a fixed upfront fee and choose whether interest is collected at maturity or discounted from proceeds.
- Review the required face amount and compare the effective rate with the lender’s stated rate.
How a compensating balance changes the amount you need to borrow
A compensating balance is a deposit a lender requires a borrower to maintain while a loan is outstanding. It may be restricted or simply unavailable for the borrower’s operating use. That means the face amount on the note can be larger than the cash the borrower can actually use.
This calculator works backward from the usable cash target. Let F be usable funds needed, L the loan face amount, r the stated annual rate as a decimal, d the term in days, Y the day-count basis, c the required balance percentage as a decimal, E the existing qualifying balance, and f the upfront fee. Interest is I = L × r × d ÷ Y.
The required bank balance is B = c × L, while the new cash tied up by that requirement is R = max(B − E, 0). For a collect loan, interest is due at maturity. For a discount loan, it is withheld at funding. Calling that choice q, where q = 0 for collect and q = 1 for discount, the usable proceeds equation is:
F = L − R − f − qI
If the existing balance covers the required deposit, the calculation uses L = (F + f) ÷ (1 − qrd/Y). Otherwise it uses L = (F + f − E) ÷ (1 − c − qrd/Y). The calculator checks the covered-balance case first, then uses the binding-balance equation only when the resulting required deposit exceeds the existing balance.
Why the effective rate is higher
The interest charge is based on the full face amount even though some of that amount is restricted or withheld. The calculator reports the term cost as (I + f) ÷ F and annualizes it as (1 + (I + f) ÷ F)^(Y/d) − 1. A higher required balance, a larger fee, and discount interest all increase the face amount or reduce usable proceeds, raising that effective rate.
An existing qualifying deposit can reduce the newly restricted cash. It only improves this estimate if the balance truly would have remained at the lender without the loan; moving money there solely for the transaction is an additional use of cash.
What this calculator leaves out
This is a simple-interest planning model, not a regulatory APR calculation. It does not value interest earned on the deposit, foregone investment returns, taxes, variable rates, unused-line fees, renewal costs, covenants, or interim principal payments. Loan documents can also apply their own day-count and rounding rules, so confirm the actual proceeds and maturity amount with the lender.
Worked example
Suppose a borrower needs $100,000 of usable cash for 90 days. The note rate is 8% on a 360-day basis, the lender requires a 20% compensating balance, there is no existing qualifying balance or fee, and interest is collected at maturity.
The balance requirement binds, so the face amount is $100,000 ÷ (1 − 0.20) = $125,000. The required deposit is $25,000, leaving $100,000 usable at funding. Interest is $125,000 × 0.08 × 90 ÷ 360 = $2,500, and the gross amount due at maturity is $127,500. The term financing cost is 2.5% of usable funds, which annualizes to about 10.38% on this basis.
Common questions
What is a compensating balance?
A compensating balance is a deposit a lender requires a borrower to keep with the lender as a condition of credit. The borrower may still own the deposit, but cannot use the restricted portion for the intended purpose while the requirement applies.
How does a compensating balance increase a loan’s effective rate?
Interest is charged on the loan’s full face amount, but the borrower has less cash available because some proceeds must remain on deposit. Dividing the interest and fees by the usable cash rather than by the face amount therefore produces a higher rate.
How much must I borrow to receive a specific usable amount?
The required face amount depends on whether an existing qualifying balance already covers the lender’s deposit requirement. This calculator solves both cases and selects the amount that leaves the usable cash target after the incremental balance, fees, and any discounted interest.
Does an existing checking balance reduce the effective borrowing cost?
It can reduce the new cash restricted by the loan, which can reduce the face amount required. This only reflects a real economic benefit when that checking balance would have stayed at the lender even without the loan; otherwise it is still cash committed to the arrangement.
What is the difference between collect and discount interest?
Collect interest is paid at maturity, so it does not reduce the initial proceeds. Discount interest is deducted when the loan is funded, so the borrower must borrow more to receive the same usable amount and repays the face amount at maturity.
Is the effective annual rate the same as a disclosed APR?
No. The effective annual rate here compounds the modeled term financing cost to an annual figure for comparison only. A disclosed APR follows applicable legal rules and may treat required deposits, fees, timing, and compounding differently.