What is business of banking?

Business banking also known as commercial banking refers to a company’s financial interactions with a bank that offers services like credit, loans, savings and checking accounts. Unlike, retail banking where common people like you and I can avail of a bank’s services, business banking, as the name suggests is intended solely for businesses.

In this blog, we dissect the what, why and how of business banking. Let’s dive in.

Corporations, partnerships, limited liability companies (LLCs), and sole proprietorships are the ideal candidates for business banking. Business banking offers products like asset management, business loans, and electronic fund transfer amongst other services, specifically built to suit the financial demands of businesses.

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Be it a small enterprise employing twenty-odd individuals managing day-to-day transactions or a large firm with hundreds of employees dealing with a substantial amount of money, being savvy with business banking is a must.

Quite often most small business owners & founders use retail banking services convinced that they don’t need business bank accounts. When in reality, business banking products are created to help make business money management seamless.

Here are some of the key differences between the two:

Financial institutions extend advisory and financial services to large corporations as well as small and medium enterprises (SMEs). They curate their business banking services to meet the specific requirements of every business.

At the same time, the majority of a bank’s profits typically come from its business clientele because of the amount of money involved in corporate loans and the large volume of transactions going through.

Banks derive an income from various charges that come with their business banking services. For example, as a current account holder, your bank may charge you a fee if you fail to maintain the monthly average balance (MAB).

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Banks also make money on the loans they make to businesses by way of the interest they charge.

Creating a business bank account is one of the first things that you as a business owner need to do when starting your new firm. And, here’s why getting it right is absolutely essential:

Starting a firm would mean creating a legal entity separate from you, and therefore, your personal finances. As a business owner, you must keep your money and your business’s funds separate, which will keep the tax woes that arise out of mixed funds at bay.

Needless to say, if your personal finances are mixed up with those of your business, separating them will be a time-consuming and difficult process.

Keeping a separate business account for all transactions would ensure that you have a clean record to provide your accountant with, every year. Bear in mind that you must keep all invoices and receipts to match up with your chequebook and bank statement. This will go a long way in keeping your financials clean and comprehensible.

In short, don’t mix your money with that of your business – open a business account instead!

Mixing business and personal transactions over a considerable period can make your financials look confusing. More often than not, this is a direct result of not having a separate business account. It is vital that you sort all of this out, especially before their taxes fall due.

This distinction is critical if your business is being audited. The accounting requirements for any business are generally complex in nature. If all your funds are together, the classification of personal and business transactions can prove highly difficult. This can get you into trouble with the tax authorities.

Regardless of its size, a business is vulnerable to legal issues for a dozen reasons. To avoid those, for starters, you must create a separate business entity to minimise the risk of losing personal assets if a lawsuit is filed against your business. You have several options – from a sole proprietorship to partnerships and corporations of various kinds.

When it comes to liabilities, the first thing that the courts look into is whether the business has a dedicated bank account or not. They also check if business funds have mixed with your personal funds.

If your personal finances have mixed with business transactions at any point, then your personal assets may be at risk. This is why you must ensure you don’t use your personal bank accounts for business purposes after the incorporation of the business.

Using a business bank while conducting transactions with suppliers, vendors, or clients makes your company more credible & legitimate.

As the world evolved, so did business banking. Today we have both traditional business banking which operates from physical branches as well as digital banks that exist entirely online. Even though the services offered are mostly similar in these modes, digital banking has become more popular on account of its ease of use, smoother UI & smart dashboards.

Traditional business banking:  These are organisations that are present in physical locations. They often provide the whole spectrum of banking services, such as credit cards, checking accounts, savings products, and loan products.

Digital business banking: This type of banking operates solely online. Online-only banks may typically provide banking products with cheaper costs and higher rates than their conventional counterparts since they don’t have to cover expenses like rent and utilities.

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Most SMEs sideline the importance of business banking simply because they believe that retail banking could easily take care of their smaller financial needs. However, according to a survey conducted by RazorpayX, businesses lose over 67 lacs in one single year on conventional banking systems.

Businesses are unique in their needs and styles of operations. But, business owners across the board seek business banking that is easy to work with, saves time and effort, and gives them a delightful experience by design.

Unfortunately, finding all of this with one business banking partner has long been difficult.

We decided to change that.

Armed with automation and built for future-forward businesses, RazorpayX takes care of your business banking, so you never have to worry about your money again.

With a RazorpayX Business Account, you can

… and a whole lot more.

Running a business is hard. Managing your business finances doesn’t have to be.

KEY TAKEAWAYS

Business banking relates to the financial dealings that a business has with a financial institution. Essentially, business banking is the same as personal banking but is specific to business. This is for things such as savings accounts, checking accounts, credit, and business loans.

These services are designed specifically for companies and businesses instead of consumer banking. Business banking happens when a bank or financial institution deals with a business. There are different types of banks, where a retail bank would deal with individuals, and an investment bank deals with capital markets.

Banks provide advisory and financial services to businesses of all sizes, from small businesses to large corporations. The services that the bank offers are typically tailed specifically to the individual business. This ensures that the business receives exactly what they require since some operate differently than others.

These services can range, as well. It could be for real estate loans, commercial loans, deposit accounts, credit card services, and even non-interest-bearing products. A bank might also offer a business securities underwriting or asset management for corporate and business clients.

A bank will usually earn profits from the businesses they work with. This can often be due to a large number of corporate loans and the interest charged.

Each individual business is going to have varying requirements and needs. Some companies might need credit to purchase fixed assets if they operate in capital-intensive industries. Others might need to finance their capital through credit.

For this reason, banks offer customized services that are tailored to each individual business. Here are some of the most common types of business banking services.

Opening a business bank account is often one of the first things that a business owner will do. It’s important to separate any business banking from personal banking.

Some of the most important features of business banking include:

There are a few different things that business banking will need to include when it comes to specific characteristics. These include authority, degree of independence, and liability. Let’s take a closer look at each of the characteristics.

Owners and businesses in general are going to benefit most from business banking. Having a business account provides the opportunity for easier tax filing and seamless expense tracking. As well, keeping a business account in good standing for an extended time can help establish credibility.

This can lead to more favorable agreements if your business decides to take out a loan or incur other types of debt in the future.

Some of the primary advantages of business banking include:

Here are some of the primary disadvantages of business banking:

Business banking relates to a business or corporation dealing with a bank for their financial needs. This can range from opening and holding checking or savings accounts, and can also include other services such as acquiring a business loan or receiving business advice.

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.

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.

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.

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.

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.

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

Commercial or corporate banking are other terms for business banking. Small and medium enterprises, as well as larger corporations, need banks for financial and consulting services. These services are customised to meet the demands of each company. Deposit accounts and non-interest-bearing products, real estate loans, commercial loans, and credit card services are among these services. Asset management and securities underwriting are two services that banks may provide to their corporate and business clients.

The Glass-Steagall Act, commonly known as the Banking Act of 1933, mandated investment banks and retail/commercial banks to be separate organisations in the past. After portions of the statute were repealed in 1999, this changed. Banks could now offer corporate, retail, and investment banking services all under one roof under the new guidelines.

As the business sector in the United States grows, so does the demand for business banking. Since 2002, when there were 7,870 commercial banks, there have been 4,708 commercial banks, down from 7,870 in 2002. Mergers and acquisitions have had a major role in this. Wells Fargo, JPMorgan Chase, and Bank of America have the highest market share in corporate or business banking, with JPMorgan Chase being the largest commercial bank in the United States with $142 billion in revenue in 2019. It’s worth noting that these banks also function as investment banks and retail banks, allowing them to broaden their client base and product offerings.

When a company’s cash requirements exceed the available balance in its current account, it often takes out an overdraft from a bank, for which the bank charges interest. Overdrafts are frequently used as a backup source of cash for unexpected expenses. For small and medium businesses, an overdraft is a typical source of liquidity.

Example- If a small retail company in New York needs emergency cash to pay suppliers, it can take out a secured overdraft against its bank’s fixed deposit. Because the overdraft is secured by a fixed deposit, the interest rate will be reduced, and the firm will be able to pay off the principal and interest on cash receivables.

When a company wants to expand its operations, such as by purchasing a new property, plant, or machinery, it usually opts for a bank loan with a fixed duration and a fixed or variable rate of interest. The lending companies can expand their business with the help of the bank without depleting their cash reserves.

In international trade, a letter of credit, or LC, is commonly employed. If the importer (or buyer) is unable to complete the payment, the letter of credit agreement stipulates that the issuer of the LC, i.e., the bank, will make the whole or remaining payment to the exporter (or seller) on behalf of the buyer.

Example-

Let’s say a furniture company in the United States, Ladder Inc., wishes to sell $100,000 worth of furniture to a company in Kenya, ABC. Nonetheless, Ladder Inc. is concerned about the ability of Kenyan businesses to pay them.

To deal with this, Company ABC obtains a letter of credit from its bank, Bank of Kenya, stating that either Company ABC would make good on the $100,000 payment within 60 days, or Bank of Kenya will pay the bill. The letter of credit is subsequently sent to Company Ladder Inc., which agrees to ship the furniture.

After the shipment is delivered, Company Ladder Inc. requests $100,000 from the Bank of Kenya by producing a written draft (also known as a bill of exchange).

Treasury management services, such as payment collection, are provided by banks. Disbursements, trading, and bond and foreign exchange investments. Banks have a separate department dedicated to treasury management and charge a set fee for these services.

Example-Assume that a company in the export industry has a regular requirement for foreign currencies. The corporation can then use the treasury service of the bank to obtain the best foreign currency rate.

Conclusion. Business banking refers to a company's financial dealings with a financial institution that specialises in providing business loans, credit, savings accounts, and checking accounts to businesses rather than individuals.