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Commercial Banks Explained for SME Owners

So many people here in the UK who launch a small to medium business rely on their current bank instead of opting to open a business account with a commercial bank.  Today we’re going to take a look at commercial banks so that our readers have the knowledge they need to make an informed decision on which type of bank will best suit their business needs.

A commercial bank offers services to businesses, including the facilitation of business lending, commercial finance and loans via different financial products.  A commercial bank can provide business loans, offer basic investment products and accept deposits.  There are three different types of commercial banks:

  • Public sector 
  • Private sector
  • Foreign.

When a customer borrows from a commercial bank, the bank creates a credit facility that is, in effect, a customer deposit (this practice is known as credit creation).  Commercial banks also accept other types of deposits, including saving account deposits, recurring account deposits and fixed deposits. 

Commercial banks offer a variety of types of loans and advances, including overdrafts, cash credit, invoice discounting and asset finance.

Commercial bank secured loans are a loan where the borrower pledges an asset as collateral or security for the loan.  The loan is then a secured debt owed to the bank – this is the basic principle that underlines asset-based lending.  If the customer defaults on the loan, the bank takes ownership of the asset used as collateral and can then sell that asset to realise its value against the debt owed.

Commercial bank unsecured loans are financial loans that are not secured against any of the borrower’s assets.  These types of loan include credit cards, credit lines to large corporate companies and loans to small to medium enterprises (SMEs).  These types of unsecured loans include the following:

  • Bank overdrafts
  • Corporate bonds
  • Credit card debts
  • Credit facilities
  • Lines of credit.

Commercial banking usually involves a division within a bank that is focussed on business accounts and working with business owners.  These services are sometimes described as “business banking”, rather than “commercial banking).  Many commercial bank divisions focus on lending money to help businesses remain afloat.   A bank may offer some of the following services to business banking customers:

  • Payroll processing
  • Payment of quarterly taxes
  • Financial planning services
  • Management of retirement accounts for commercial banking customers.

As a business owner, if you haven’t already switched to a commercial banking service, this is something you may decide to consider as your business expands.  Most commercial banks are large companies, some with business overseas as well as in the UK.  A commercial bank will have the facilities to offer customers low prices on financial products as they buy in bulk and sell at discount. 

Compared with a credit union, a commercial bank offers a wider range of products and services.  A commercial bank will often offer all the services that a small banking company offers and additional services.

Next week we’ll take a look at the advantages and disadvantages of using a commercial bank.  If you want to make sure you have the information you need to make an informed decision on your future business banking, why not follow us on Twitter or Facebook so that you know when the article is published?