Compensating Balances Are Frequently a Part of Revolving Lending Arrangements

question 76

Essay

Compensating balances are frequently a part of revolving lending arrangements with banks, yet they add to the cost of financing for the borrower.Why, then, would borrowers agree to such terms? What other types of financing are there that the firm could use as an alternative?

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Definitions:

UCC Article 4A

Governs the transfer of funds through electronic means between banks, establishing a legal framework for such transactions.

Wholesale Funds Transfers

involves the large-scale movement of money, typically through electronic systems, between banking institutions or within large corporations.

Credit Transactions

Financial agreements where payment is deferred to a future date, including loans, credit card purchases, and lines of credit.

Service Charge

A fee collected for the provision of a service, often added to the cost of services in areas like hospitality, banking, and real estate.