What Is Commercial Banking?

Definition and Overview of Banking for Businesses

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

Commercial banking refers to products or services specifically designed for businesses. Commercial banks may also work with consumers, but they have the ability to help businesses manage their money and keep operating.

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 to 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. Businesses might be starting out, or their assets might be tied up in inventory or expensive equipment. Loans can help businesses buy supplies, real estate, and vehicles necessary to operate. For new businesses, an 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 short-term sources of cash. They might need to pay employees while waiting for customers to pay for recently shipped orders, for example, and then they might quickly pay off those loans once the cash becomes available.
  • Letters of credit: Trading with customers and suppliers overseas is 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.
  • Lock box services: If businesses need to efficiently handle payments in large volumes, lock boxes 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 also can help businesses lower their risks.
  • Foreign exchange: When businesses operate overseas by 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.

Benefits of a Business Account

Even if you have a small, home-based business, a business account is a good idea. Perhaps the most important benefit is the ability to separate your business finances from your personal finances. This helps you with your day-to-day bookkeeping, but it's also important when it's time to file your tax return.

By having separate business and personal accounts, you can know exactly what activity was yours and what was your businesses.

A separate business account under the name of your business also lends a bit of credibility to your operation. Customers, for example, might be less comfortable making a payment to you, personally, for a product or service, as opposed to making that payment to whatever the name of your business might be.