Business Banking

What is Business Banking?

Business banking involves activities and offerings that financial institutions engage in to solve the financial challenges of businesses. The specialized suite of financial products and services is designed for companies to compete effectively and for financial institutions to grow their share of wallets.

Business banking relies primarily on the business, although support by owners is considered a secondary factor.  

Business banking and commercial banking are terms sometimes used interchangeably, but institutions may define them as segments of increasing client size and complexity. Institutions’ reliance on the business entities compared to the owners varies by business size and complexity.

For large public and private enterprises with more complex needs, business banking is no longer sufficient, and corporate banking and investment banking advisors may be required. 

Products and Services 

Many banking products and accounts share features with retail banking, while others have no parallel. These include deposits, credit, treasury and payments, and advisory services to conduct global commerce.

Businesses need convenient access to funds. Products and services to accept and use deposits are an essential liquidity function provided by financial institutions.  

Commercial banks offer commercial loans and other credit products whenever a business requires funds beyond the capital it has available on its balance sheet. This credit creation function may finance a borrower’s working capital funding gap, or it may finance capital expenditure (CAPEX).

Many treasury and payment service offerings enhance business clients’ operational effectiveness and efficiency.

Institutions may also offer advisory services to businesses that engage in international trade via their global commerce divisions.

Deposits

Several forms of deposit acceptance are common and depend on the liquidity of the account. Liquidity varies from immediate (on-demand) to indeterminate and fixed-terms.

• Business chequing, or current account, provides funds on demand. With high liquidity preference, little interest (if any) is paid on such deposits. Businesses access the balance via cash withdrawals, cheques, drafts, and various electronic payments.
• Business savings accounts pay some interest on deposits above daily operational needs. While businesses can access the funds anytime, the interest rate is typically based on average balances and may be tiered into ranges. Additional transaction fees apply to separate the purpose and utility of this account compared to high-transaction chequing or current accounts.
• Businesses also keep non-current accounts to earn higher interest. Unlike chequing and savings accounts, funds within are not required immediately. By giving up liquidity, businesses may participate in the money market. Money market instruments have short (less than one year) and fixed durations; the reward for the duration risk is in the form of higher interest. These funds are less liquid and provide a higher interest rate than other deposit accounts. 
• Clients may forfeit interest if an instrument is redeemable and cashed before maturity. Accounts may hold certificates of deposit, banker’s acceptance, commercial paper, and other money-market instruments, such as treasury bills.   

Credit

Much like deposits, forms of credit are purpose-driven to finance a variety of use cases. The duration of credit offerings ranges from short-term (demand) to long-term.

• Revolving credit, asset-based lending, and bankers’ acceptance are some short-term credit that commercial banks offer. These bridge the funding gap due to working capital activities involving cash inflow and outflow. Commercial banks have immediate repayment options, or on-demand, under most credit agreements. Facilities are renewable annually, so these are short-term in duration and are current liabilities for the business.
• Senior term debt, such as amortizing or non-amortizing loans, is intermediate in duration. Credit is extended to support equipment financing, capital expenditures, and other cash flow for investing activities such as business expansions and acquisitions. Terms tend to extend beyond one year but less than ten. The interest rate may be variable or fixed. Institutions may offer a contract for a set interest rate and length to the borrower in the absence of any events of default.
• Credits against commercial real estate and real estate development rely on long-term mortgage facilities with the most prolonged repayment period. While they share many similarities to other loans, specific mortgage regulations are often specific to a particular jurisdiction. Like residential mortgages for retail banks, commercial real estate loans form a significant portion of most commercial banks’ credit portfolios.

Treasury and Payments

Beyond deposit acceptance, many money management solutions are available for businesses to address treasury and payment needs. Below are examples of fee-based products and services in this category.

• Automating invoicing, collection, and merchant/point of sale solutions support a business’s sales and collection cycle and the current asset side of the balance sheet.
• Cheque issuance, clearing, charge and credit cards, and electronic payments are services that support the acquisition and payment cycle and current liability side of a business’s balance sheet.
• Consolidated monitoring, control, reconciliation, and auditing capabilities support the reporting cycle and decision-making by linking to information systems (like accounting and inventory management software).

Global Commerce

For domestic and international trade, institutions also offer services to manage risks arising from these business-to-business activities.

• Beyond natural hedges, access to the spot market or forward market may be suitable to protect a business’s exposure to foreign exchange and other risks. Financial hedges such as future and forward contracts offered by advisors may cover risks involving currencies, interest rates, agriculture products, and other commodities.
• Documentary collections, financial or performance letters of credit, letters of guarantee, and other trade finance products are common to support the delivery of goods and services under contract.
• In many jurisdictions, public and private institutions may collaborate via export credit agencies to support businesses that engage in global commercial activities.

More Resources

CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

• Commercial Bank
• Corporate Banking
• Merchant Bank
• Monetize
• Private Banking
• See all commercial lending resources