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The Pros and Cons of Commercial Banks for Business Owners

Last week we brought you a detailed explanation of commercial banks and we promised that this week we’d take a look at the pros and cons when it comes to using a commercial bank for your business requirements.

The commercial banking market here in the UK is dominated by the big name banks – HSBC, Barclays, Lloyds Banking Group, Royal Bank of Scotland Group and Spanish-owned Santander UK.  The same large banks also dominate the retail banking market so they’re all household names that any small to medium business owner will recognise.   The banking sector here in the UK is the largest in Europe and the fourth largest in the world, with more than 300 banks and 45 building societies.  Around 2.2 million people work in financial and related services. 

The Big Four Banks (HSBC, Barclays, Royal Bank of Scotland and Lloyds Banking Group) manage more than 75% of UK current accounts and 85% of business accounts, holding more than £5 trillion in assets and employing around 560,000 workers.

The Pros of Using a Commercial Bank

  • Commercial banks can make it easier for small businesses to manage day to day financial tasks.
  • A commercial bank may offer invoicing services with personalised invoices, or set up transfers to other banks, simplifying your accounts procedures.
  • An established commercial (business) account with the bank will make it easier to borrow money in order to expand your business.
  • Some commercial banks may offer retirement account management for your employees, together with other employee benefits.
  • Your commercial bank may offer discounts on your merchant services fees.
  • Commercial banks will enable you to set up direct deposits for your employees as well as for any invoices you need to pay others.
  • Some banks will assign a representative to work directly with your company to find the best services and solutions for any issues your business is facing.
  • Banks provide real time assistance to business by providing funding when they need it.
  • Business confidentiality is maintained as the information given to the bank by borrowers is kept confidential.
  • Formalities like the issue of prospectus and underwriting are not necessary for raising loans from a commercial bank, making it an easier source of funding.
  • A loan from a commercial bank is a flexible source of funding as the loan amount can usually be increased in line with business requirements and the loan can be repaid in advance when the funds are no longer needed.

The Cons of Using a Commercial Bank

  • Commercial bank accounts are often more expensive than traditional bank accounts. 
  • Banks may charge fees for night deposits, for processing a certain number of checks and for payroll services.
  • As a source of finance, funds are usually available for short periods and extension or renewal may be uncertain.
  • A commercial bank will carry out a detailed investigation of the company’s affairs, financial structure, etc. and may ask for security of assets and personal sureties.
  • Difficult terms are sometimes imposed when granting a loan – such as restrictions on the sale or mortgaged goods, making it more difficult to do business.
  • Depending on the size of your business, some of the services offered may not be relevant but you may still be charged for them even though you don’t use them.
  • Signing up for a commercial account before your business is ready will cost you and could slow down business growth initially.
  • If you choose the wrong bank for your business, opening a new account and transferring all of the services will be costly and time-consuming.