What is Business Banking?
Banking services provided solely to business units are known as business banking facilities. Business units, which include corporations and limited liability partnerships (LLPs), may avail of services such as the provision of business loans and credit, and savings and checking accounts.
The owners of business entities are in close contact with the bankers in the case of business banking. In some situations, the owner’s personal bank account may also be used for the purposes of business banking. Banks may engage in business banking by catering specifically to business entities or by setting up separate units that specialize in the same. Therefore, the latter type of banks oversees multiple units that may undertake retail banking, corporate banking, business banking, etc.
Business Banking Services
The requirements for every type of business are unique. Companies may require to finance working capital through credit, while small businesses in capital-intensive industries may require credit for the purchase of fixed assets. Therefore, the services provided by a banker are customized to suit the specification of each customer. Some of the customized services include:
1. Bank financing
Bank financing involves the provision of fixed-term loans, long-term loans, asset-based loans, and short-term loans as per the capital requirements of the business.
2. Cash management
Capital management services entail expert management of receivables, payables, and cash in hand. They result in lower transaction costs and more liquidity with the business.
3. Industry-specific advice
Some banks also cater to specific industries, such as commercial real estate or agriculture. In countries such as India, there is a large number of small and independent businesses that are governed by special regulations. Therefore, many local banks set up units that cater specifically to micro- and small- and medium-sized enterprises.
4. Automated Clearing House (ACH)
Automated clearing house refers to payment processing systems that accelerate the process of digital money transfers. They also facilitate the automatic transfer of money from accounts that are idle to those that would produce interest income for the owner.
Characteristics of Business Banking
1. Authority
The formation of a business bank account can be authorized by anyone who holds an ownership stake in the business. There are no requirements, such as an official vote by the board of directors.
2. Degree of independence
A regular business account is not independent of the owners of the business as they operate the account. In instances such as that of a sole proprietorship, the owner uses her personal bank account for the purposes of business banking. It is usually done because sole proprietorships aren’t recognized as independent business units.
All transactions of the business account opened as a personal account of the owner becomes part of the credit history of the owner. Similarly, the amount and interest rate applicable on credit extended via personally held business accounts may be subject to the credit report of the owner.
3. Liability
Business accounts that are closely tied with the owners may or may not be considered as personal assets. Therefore, a business account does not offer any degree of protection to business assets from the personal creditors of the owner.
More Resources
CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:
