Twenty Percent Rule

Generally speaking, if we get good service at a restaurant, we’re going to tip at least 20%. That’s our own Twenty Percent Rule, because hey, server life is hard. We know.

In the finance world, however, the Twenty Percent Rule is something a little different. It’s a rule of thumb that commercial banks often use with their corporate clients, and it says that the client should have deposits worth 20% or more of their average borrowed credit balance.

The goal is to lower the risk to the bank. If Tasty Paste Edible Adhesives, LLC wants to borrow $100,000, they’ll have to deposit $20,000 in another non-interest-bearing account that the bank can seize if the loan goes south. Another little bonus for the bank is that they’re making interest on the entire $100,000, even though the company has effectively only borrowed $80,000, since it had to set that other $20k aside. But it does allow them to keep their commitments to other clients and investors should Tasty Paste default on the loan, which is why this practice exists.

We should point out that the 20% thing isn’t really a hard-and-fast rule...not like it used to be. Nowadays, it really is more of a guideline, and sometimes we can even get the whole deposit requirement stipulation waived if we have a good enough relationship and history with the bank.

At any rate, it’s rare that we’ll see a deposit requirement over 25%, unless our company has a seriously spotty financial record, or is dealing with a seriously paranoid bank.