Please explain how to work through and what compensating balance is:

13. Lark and Willow needs to borrow $200,000 to purchase seasonal inventory which they will pay back in exactly one year. They have a $425,000 line of credit with a 12% compensating balance requirement. The quoted interest rate is 6.4%. How much money do they need to borrow? What is the resulting interest rate? Borrow $227,272.73 Rate = 7.273%