DEFINITION
Commercial Loans is a business-oriented offering that focuses on global trade services and treasury management services.
The Key Takeaways
- Commercial banking offers businesses a range of services similar to those available to consumers plus additional services tailored specifically to business.
- Open a commercial bank account to protect your personal banking accounts from business liabilities and tax issues.
- Commercial banking is a vital source of cash for many businesses, allowing them to continue their business operations and provide cash when they need it.
Definition and example of Commercial Banking
Commercial banks have a much wider range of customers than retail banks, which are designed to serve individual account holders as well as some small businesses. These large banks cater to the needs of businesses for large loans, credit lines, and deposit accounts. Retail banks are often just branches of larger institutions.
Commercial banks have a corporate banking arm that can assist small businesses, and an investment bank for large corporations. These banks may also serve as Retail Bank, working with individuals.
These banks are usually stock corporations and their goal is to maximize profits for their shareholders. This is done through “financial intermediary,” which matches savers willing to keep their money with the bank with borrowers in need of loans.
Commercial banks facilitate money movement between savers, borrowers and businesses by receiving customer deposits, placing them in various types of accounts, extending loans to individuals and businesses with interest, and paying interest to borrowers.
Note:
Commercial banks are liable for the interest they pay to their borrowers. However, they can make a profit by lending money at higher rates.
How Commercial Banking Works
Commercial banks offer a variety of services, even though they specialize in providing short-term business credit.
Deposit Accounts
Like individuals, businesses also need checking and saving accounts. Savings accounts allow businesses to accumulate cash and pay suppliers and employees. Checking accounts are used for payments.
Loans
Business owners need money to grow and operate, but they may also require extra funds to make large purchases. This is where commercial banks come in. They provide loans for businesses to purchase real estate and vehicles, as well as supplies.
Lines of Credit
Lines of credit are similar to small business credit cards and provide funding that is short-term for a variety of business expenses. A commercial bank’s line of credit can provide a cash infusion while waiting for receivables. For example, if a company needs to pay employees and is still awaiting payment from customers for recent orders.
Letters of credit
A letter of credit is useful when businesses don’t know who they are dealing with, or the other person is in a different country. A letter-of-credit is useful when businesses are not sure who they’re working with or the other party is located in a country with different laws.
Lockbox Services
Lockboxes are a great solution for businesses that need to efficiently manage payments at large volumes. The bank sets up a post box at a nearby location and customers mail their payments there. Once the money is received, the bank deposits it into the business account. This allows businesses to receive checks and deposit them more quickly.
Payment and Transaction Processing
Businesses, like individuals, may have to accept payment from their customers in different ways. Customers prefer to pay by credit card, electronic check, or paper check. Banks can help with this and also manage the risk of chargebacks and fraudulent payments.
Foreign Exchange
Businesses that accept or spend money abroad may need to deal with local currencies. Commercial banks can help businesses convert their money and manage currency price fluctuations.
Investment Banking
Most commercial banks have a investment bank that assists businesses with less frequent financial transactions. This function can be helpful if, for example, a company wants to “go private,” sell a significant amount of debt or use another method to finance an expansion.
Note:
Most new business owners must guarantee or accept responsibility for business loans, unless they own assets that can be pledged as collateral.
Commercial Bank Accounts Offer Many Benefits
Opening a business bank account is beneficial for any business, even if it’s a small one.
- This separates personal and business finances. It can also be useful for filing your tax returns. You will know which activities are personal and which ones are related to your business.
- It gives credibility to your business. For example, customers may feel more comfortable paying a company than you personally for a service or product.
- This helps you pay for big expenses. Commercial banks can offer your company capital it may not have been able to raise on its own.
- It can build credit for your business. It can be used to build credit for your business and help you secure better terms of lending in the future.
- Commercial accounts are insured. Your personal accounts are covered by the FDIC up to $250,000.
Note:
Business accounts may not be protected by the same consumer protections as personal accounts. Federal law may not require that banks reimburse you if thieves drain your account. 9
Commercial Banking vs. Investment Banking
| Commercial Banking | Investment Banking |
| Directly serving commercial banking customers | Serving as a middleman between investors and business |
| Provides banking services to commercial banking clients such as loans, deposit accounts and more. | Helps you raise capital, launch an initial public offer, conduct mergers and purchases, and much more. |
Commercial banks are often involved in investment banking, but these two types serve different purposes. Investment banks act as intermediaries between investors and companies, helping them raise capital, launch an initial public offer, conduct mergers and acquires, etc. Commercial banks do not offer these services.
Note:
You can deposit business money at your retail bank if it also serves as a commercial one. This will make things easier for you. If you own a small company, or are a sole owner, it is a good idea for you to have separate accounts.
