Business Banking vs Commercial Banking: What They Are and How to Choose
Does business banking vs commercial banking sound the same to you? Is that a ‘yes’ you are about to say? While the two might seem similar, they are actually quite different. From the target market to the services and products offered.
As a business owner, it’s important to understand these two terms. It will help you choose the right banking needs for your company. And you have come to the right place! In this article, you’ll learn the basics of business and commercial banking, the key differences between them, and how to determine which one is best suited for your business needs.
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Business banking is a financial service offered specifically to small business owners, e.g. sole proprietors, and startups. These tend to be businesses with low to medium translation volume and even fewer employees, at most 100. The whole idea of business banking is to separate retail banking and meet the basic banking needs for running small businesses.
Why do you need a business banking account? Even as a sole proprietor, it’s important to separate your personal and business finances. That’s where a business banking account comes in.
Financial institutions providing business banking will often offer several services and products, including:
Business Operating Account
A business operating account is one of the basic but key accounts every business requires. In simple terms, it is the current or checking account your business uses to receive payments from clients and make payments to vendors.
Business Savings Account
A business savings account is just that; a savings account you use to stash funds for a rainy day. Besides meeting unexpected expenses, you can set aside funds in a savings account for capital purchases or other business investments. As such, it’s important to ensure you use an interest-earning account so your funds don’t lie idle.
Merchant Services
Merchant services enable you to accept various forms of payments from your customers, including credit and debit card transactions. These services often include point-of-sale systems, payment gateways for online transactions, and support for mobile payments, ensuring that you can cater to diverse customer preferences.
Merchant services are an excellent option for your business. It reduces some of the risks involved with cash and cheque transactions, including bouncing cheques, fake currency notes and lost funds or cheques. Not forgetting the delays of clearing cheques or having to accumulate funds for banking later in the day or week.
While merchant services offer great convenience, ensure you consider the fees and other transaction charges. Banks earn fees on every merchant transaction, which range from 2% to 5% per transaction. This can be expensive for you and your clients. Before settling with any financial institution for merchant services, shop around to scout for lower rates. And, don’t be afraid of negotiating!
Small Business Loans
In addition to operating and savings accounts, business banking offers businesses access to credit. As a business owner, credit can go a long way in helping you meet various needs, including meeting working capital needs, purchasing inventory and equipment, expanding operations, etc.
Online Banking
Online banking has become a necessity. Given the current digital era we are in, it’s difficult to ignore it as a business owner. Fortunately, business banking services offer robust online platforms that allow you to manage your accounts, transfer funds, pay bills, and monitor transactions from anywhere. These platforms are designed to provide convenience and enhance financial management through real-time access to your financial information.
What is Commercial Banking?
Commercial banking, on the other hand, focuses on medium-sized businesses and large companies with less complex transactions. Due to the size and level of transactions needed by these businesses, commercial banking offers them services and products not offered by business banking. Some of these services and transactions include:
Corporate Accounts
Corporate accounts are tailored to handle high transaction volumes and significant cash flows. They offer advanced features such as multiple-user access, customisable account structures, and enhanced security measures to manage large sums of money efficiently.
Treasury and Cash Management
Effective cash management is critical for large businesses. Commercial banking provides comprehensive treasury services that include receipts, payments and liquidity management.
For receipts, the service can range from invoice factoring, and invoice discounting to receivable lockboxes and EFT deposits. For payments, the services offered include supplier payments (straight-through processing), EFT payments and other wire transfers. These services help you optimise your cash reserves, manage working capital, and ensure your business has the necessary funds to operate smoothly.
Commercial Loans and Lines of Credit
For substantial financing needs, commercial banks offer various loan products and lines of credit. These can be used for capital expenditures, real estate acquisitions, business expansions, and other large-scale investments. Commercial loans typically come with tailored repayment terms and competitive interest rates, aligned with your business’s financial strategy.
Trade Finance
If your business is involved in international trade, commercial banks provide trade finance services to facilitate your import and export activities. This includes letters of credit(LCs), trade credit insurance, and foreign exchange solutions, ensuring that your cross-border transactions are secure and efficient.
Business Banking vs Commercial Banking
Wondering which banking option is ideal for your business? It’s important to know the distinct differences between business banking and commercial banking. It mostly narrows down the size of the business. Here are the key differences:
Types of Clients Served
Business banking focuses on SMEs, including startups, sole proprietorships, and small companies. The products are designed to be accessible and easy to use for business owners and managers who may not have extensive financial expertise.
Commercial banking caters to large businesses, corporations, and multinational companies. The clients typically have substantial financial resources and require sophisticated financial solutions to manage their operations.
Scale and Scope of Services
Business banking primarily targets small to medium-sized enterprises (SMEs). The services are straightforward and designed to support day-to-day financial operations. They include basic checking and savings accounts, small business loans, and merchant services tailored for businesses with simpler, less complex needs.
Commercial banking, on the other hand, is aimed at larger businesses and corporations with more complex financial needs. The scope of services is extensive, including advanced treasury management, commercial loans, and trade finance. These services are crafted to handle significant transaction volumes and intricate financial operations.
Complexity of Financial Products
With business banking, you can expect simple and user-friendly financial products. These include basic loans, merchant services, and online banking facilities that are easy to manage and understand.
However, commercial banking provides complex and customised financial products. These might include structured finance, syndicated loans, and detailed cash management systems. The products are designed to meet the intricate needs of large enterprises.
How to Choose the Right Bank for Your Business
Whether your business needs business banking or commercial banking, it’s important to have the right banking partner.
Research and Compare Banks
There are numerous banking institutions to work with, meaning you have options and don’t have to settle for the first institution that comes your way. Take your time to look into various banks that offer business and commercial banking services. Compare the range of services, products, and fees to get a comprehensive understanding of what each bank offers.
Consider the Bank’s Reputation and Customer Service
Next, consider the bank’s reputation. What’s in the news about the bank and its management? What are its current and past clients saying about its services and customer support? Talk to other business owners in your industry to get their recommendations and hear about their experiences with different banks. Good customer service and stability are crucial, so choose a bank known for its reliability and support.
Evaluate Fees and Other Charges
Different banks have varying fee structures. Ensure that you understand all potential costs associated with the banking services, including maintenance fees, transaction charges, and loan interest rates.
Having said that, don’t just look at the fees in isolation. Consider what you’re getting for your money. Sometimes a bank with slightly higher fees might offer better services and products or more comprehensive support.
Look at Technology and Online Banking Capabilities
We are in a digital era and banks have not been left behind either. As such, there is no reason to have manual banking processes for your business still. As you look for a bank to use, ensure the bank offers robust online and mobile banking platforms. These tools will help you manage your finances conveniently and efficiently.
In addition, ensure the bank has strong security measures in place to protect your financial information. Look for features like two-factor authentication and secure online portals.
Seek Advice
Still confused? Don’t suffer in silence or settle for a bank not suited to your needs. I recommend consulting your accountant or financial advisor to help you choose the best banking firm for your company.
Consider Long-Term Relationship Potential
Finally, think beyond the immediate needs. While it’s essential to choose a bank that meets your current needs, also consider whether the bank can support your business as it grows. Look for banks that offer scalable services and have a history of supporting businesses through various stages of growth.
Conclusion
Choosing between business banking and commercial banking is a significant decision that can shape the financial health and growth of your business. Knowing the differences between these banking services helps you make an informed decision that aligns with your specific needs and goals.
Business banking offers the essential services needed by small to medium-sized enterprises, providing accessible and straightforward solutions for managing daily financial operations. It caters to the unique needs of SMEs, ensuring that you have the necessary tools to manage your finances efficiently.
Commercial banking, on the other hand, is tailored for larger businesses and corporations with more complex financial needs. It provides advanced financial products and services designed to support extensive financial operations and strategic growth initiatives.
To determine which banking service is right for your business, assess your business size, financial needs, transaction volume, and the specific financial products and services you require. Consider researching and comparing different banks, evaluating their reputation, fees, technology capabilities, and the level of customer service they provide.
