What is a Commercial Bank?

Definition and Overview of Commercial Banks

Access to Funds
••• Jordan Adams/Imagezoo/Getty Images

A commercial bank is a bank that primarily works with businesses. Commercial banks might also work with consumers, but they have the ability to help businesses manage their money and keep operating as well.

Commercial banks can help small businesses as well as large enterprises. If you run a small business, even as a sole-proprietor, it’s a good idea to use a business checking account and keep your finances separate.

Note that business accounts do not enjoy the same consumer protection as most personal accounts.

What do Banks do for Businesses?

Basic accounts: businesses, just like individuals, need checking and savings accounts. Checking accounts are used to pay suppliers and employees, and savings accounts can hold cash reserves.

Lending money: businesses need money to operate and grow, and sometimes they need additional funds for big purchases. The business might be starting out, or the assets might be tied up in inventory or expensive equipment. Loans can help businesses buy supplies, real estate, and vehicles needed in the business. For new businesses, a business owner often has to make a personal guarantee on loans unless the business owns assets that can be pledged as collateral.

Lines of credit: sometimes businesses need shorter term sources of cash. The business needs to pay employees while waiting for customers to pay for recently shipped orders, for example, and then the business might quickly pay off those loans once the cash becomes available.

Letters of credit: trading with customers and suppliers overseas is risky. When you don’t know who you’re dealing with, and the other person is in a different country with different laws, a letter of credit can help protect you.

Lockbox services: if a business needs to efficiently handle payments in large volumes, lockboxes can help.

Customers mail payments to nearby locations, and a bank gets the funds into the business’ account.

Payment and transaction processing: unlike individuals, businesses 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 lower their risks.

Foreign exchange: when businesses operate overseas (whether accepting money or spending it), they might want to work in local currencies. Banks help them convert money and manage the risk of changing currency prices.

Investment Banking: most commercial banks focus on the day-to-day activities of businesses. Investment banks, on the other hand, help with less-frequent major financial transactions. For example, if a business wants to “go public” or sell a large amount of debt to fund expansion, an investment bank will help. In some cases, the same bank acts as the commercial and investment bank for a business.