What Is Commercial Banking?

Definition and Overview of Banking for Businesses

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

Commercial banks focus on products and services specifically designed for businesses. Additionally, these institutions typically offer the same products and services you’re familiar with as a consumer, such as CDs, money market accounts, deposit accounts, installment loans, and lines of credit.

Commercial banks can help small businesses as well as large enterprises. They might also work with individual consumers, serving as both a retail bank and a commercial bank.

If you run a small business, even as a sole proprietor, it’s a good idea to use a business checking account to keep your finances separate.

What Do Banks Do for Businesses?

  • Basic accounts: Businesses, just like individuals, need checking and savings accounts. Checking accounts help with payments to suppliers and employees, while savings accounts can hold cash reserves and earn interest. 
  • Lending money: Businesses need money to operate and grow, and sometimes they require additional funds for big purchases. Businesses might be starting out, or their assets might be tied up in inventory or expensive equipment. Loans can help businesses purchase supplies, real estate, and vehicles necessary for operations. For new businesses, owners typically must make a personal guarantee on loans unless the business owns assets that can be pledged as collateral.
  • Lines of credit: Sometimes, businesses need short-term sources of cash. They might need to pay employees while waiting for customers to pay for recently-shipped orders, for example. Once receivables come in, the business might quickly pay off those loans.
  • Letters of credit: Trading with customers and suppliers overseas is complicated, and it can be risky. When businesses don’t know who they’re dealing with, and the other person is in a different country with different laws, a letter of credit can offer protection.
  • Lockbox services: If businesses need to efficiently handle payments in large volumes, lockboxes can help. Customers mail payments to nearby locations, and a bank moves the funds into the business’ account. By accepting checks, businesses can keep payment processing costs low.
  • 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 also can 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. 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,” sell a large amount of debt, or use other methods to fund expansion, an investment bank can help. 

In some cases, the same bank acts as the commercial and investment bank for a business, providing a variety of services.

Benefits of a Business Account

Even if you have a small, home-based business, a business account is a good idea. The primary benefit might be the practice of separating your business finances from your personal finances. Doing so can help tremendously with day-to-day bookkeeping, but it's also useful when it's time to file your tax return. By having separate business and personal accounts, you can know exactly what activity was personal and what expenses should go to your business.

A separate business account under the name of your business also lends credibility to your company. Customers, for example, might be less comfortable making a payment to you, personally, for a product or service. Making payments to your business might be more comfortable for customers. Plus, depending on the industry you work in, that practice might be a requirement, or it might help to limit your personal liability for business activities.

Business accounts might not have the same consumer protection as most personal accounts. If thieves drain your account, federal law might not require banks to reimburse you.

Even if you don’t call your activities a “business,” you might need to work with a commercial bank. For example, if you want to purchase real estate to use as a rental, traditional home purchase lenders might not be able to fund your loan. Commercial loans may help you buy office space or other properties that don’t fit the mold of an owner-occupied property.