sturti / Getty Images Commercial banks can help small businesses through a corporate-banking arm as well as large enterprises through an investment-banking arm. They might also work with individual consumers, serving additionally as retail banks. Since these banks are typically stock corporations, their aim is to make a profit for their shareholders. The way they typically do this is through what is known as “financial intermediation,” whereby savers who are willing to hold their deposits with the bank are matched with borrowers who need loans. To facilitate the movement of money between savers and borrowers, commercial banks receive customer deposits, place them in different types of accounts, extend loans with interest on those deposits to businesses and individuals, and pay interest to borrowers on the deposits.
How Commercial Banking Works
Although commercial banks specialize in extending short-term credit to businesses, they provide a number of diverse offerings.
Deposit Accounts
Businesses, like individuals, need checking and savings accounts. Checking accounts help firms make payments to suppliers and employees, while savings accounts can hold cash reserves and earn interest.
Loans
Businesses need money to operate and grow, but if they’re just starting out, or their assets are tied up in inventory or expensive equipment, they may require additional funds for big purchases. Commercial banks fill this role, extending loans to help businesses purchase supplies, real estate, and vehicles that are necessary for operations.
Lines of Credit
A line of credit is similar to a small business credit card and provides short-term funding for various business expenses. A line of credit from a commercial bank can help provide an infusion of cash while waiting for receivables to come in—when a business needs to pay its employees but is still waiting for customer payments for recently shipped orders, for example.
Letters of Credit
This is a document that a business can secure from a bank to vouch for its ability to pay for goods or services. Trading with customers and suppliers overseas is complicated and can be risky. When businesses don’t know whom they’re dealing with, or the other person is in a different country with different laws, a letter of credit can increase the likelihood of a successful transaction.
Lockbox Services
If businesses need to efficiently handle payments in large volumes, lockboxes can help. Customers mail payments to a post office box set up by a bank at nearby locations, and the bank moves the funds into the business’s account. By accepting payments this way, firms can receive and deposit checks more quickly.
Payment and Transaction Processing
Just like individuals, businesses may need to accept payments from customers in a variety of ways. Customers like to pay with credit cards, electronic checks, and even paper checks. Banks help make this happen and can also help businesses manage their risks of fraudulent payments and chargebacks.
Foreign Exchange
When businesses operate overseas by accepting money or spending it, they might need to handle local currencies. Commercial banks help them convert money and manage the risk of changing currency prices.
Investment Banking
Many commercial banks have an investment banking arm that helps businesses carry out less frequent, major financial transactions. For example, if a business wants to “go public,” sell a large amount of debt, or use other methods to fund an expansion, this function of a commercial bank can help.
Benefits of a Commercial Bank Account
Even if you have a small, home-based business, opening a business account offers several advantages:
It separates your business and personal finances. Having a different account for commercial banking can help with day-to-day bookkeeping, limit your personal liability in the event of a legal claim against your business, and prove useful when it’s time to file your tax return. You’ll know exactly which activities were personal and which were related to your business.It lends credibility to your company. Customers, for example, might be more comfortable making payments to a business than to you, personally, for a product or service.It helps your firm foot the bill for large expenses. A loan, line of credit, or credit card from a commercial bank can provide your business with capital that you may not be able to fund on your own.It can help build business credit. Opening a line of credit, for example, can help build your business’s credit profile and secure better lending terms in the future.Business accounts are insured. Just as your personal bank accounts are FDIC-insured up to $250,000, your commercial accounts are protected, as well.
