What Is Business Banking? Definition & Overview
You likely opened your first bank account when you were younger. It’s a great way to help save your money and you can monitor how much you have and withdraw amounts when needed. Similar to a personal bank account, operating a business means you’re going to need a separate bank account.
There will be several different kinds of financial dealings you go through as the business grows and you begin earning profits. As your business grows, there will likely also be a need to take out certain types of business loans.
This is where business banking becomes beneficial. There are many different types of accounts that you can open and leverage. But where should you start and what exactly do you need to know? Keep reading to learn more. We’ll break down how it works, the types, importance, benefits, and more.
Table of Contents
- Business banking includes a broad range of services offered by a bank to a business or corporation.
- Some banks have the ability to offer investment banking, retail, and business banking services.
- In the United States, the largest bank is JP Morgan Chase in regards to assets.
- There is a broad range of business banking services, from savings accounts, checking accounts, credit, and loans. These services are also tailored specifically to the individual business.
What Is Business Banking?
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.
How Does Business Banking Work?
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.
Types of Business Banking Services
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.
- Cash management: This service involves managing things like cash in hand, accounts payables, and accounts receivables. It can help provide a business with more liquidity and lower transaction costs.
- Bank financing: Some businesses need long-term loans, fixed-term loans, short-term loans, and asset-based loans. These needs will vary depending on a business’s capital requirements.
- Industry advice: Different industries can have different banks that tailor directly to them, like agriculture or commercial real estate.
- Automated clearing house (ACH): This type of service relates to the payment processing systems that help process digital money transfers.
- Payroll services: Payroll is an important aspect of many businesses. Some banks offer software and specific services to help with everything that relates to payroll management.
- Fraud protection: There can always be a risk of fraud when business is conducted. Many banks offer fraud insurance to protect against fraud that could happen with their checking accounts. For instance, it could include protection from problematic checks from vendors or employee fraud.
Importance of Business Banking
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:
- The ability for accurate bookkeeping
- An audit trail in case the IRS needs documentation and information
- A separate business account for incorporated businesses
Characteristics of Business Banking
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.
- Authority – Creating or forming a business bank account can be done by anyone that has a level of ownership stake in the actual business. There also isn’t a requirement to do this either, such as the board of directors conducting an official vote.
- Degree of independence – Opening a business bank account requires it to be independent of the owner’s individual accounts. However, in the instance of a sole proprietor, the owner can use their personal bank account for the purposes of business banking. This is because a sole proprietor isn’t recognized as an independent business unit.
- Liability – This is an important element to consider with business banking. Business accounts that have close ties with the people that own them might lead to the account being considered a personal asset. So, a business account doesn’t provide the account holder any level of protection to business assets from personal creditors.
Who Benefits from Business Banking?
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.
Advantages and Disadvantages of Business Banking
Some of the primary advantages of business banking include:
- Financing – You can obtain access to a primary source of capital for future business expansions, equipment purchases, or acquisitions.
- Cash management – This allows you to manage cash on hand, receivables, and payables much more efficiently.
- Payroll services – Several financial institutions offer payroll services designed for small businesses.
- Fraud protection – Keep your business protected from various types of fraud, such as problematic vendor checks or employee fraud.
Here are some of the primary disadvantages of business banking:
- Cost – Depending on the services you’re using, there can be high fees and interest rates from the bank, leading to high costs.
- Business hours – While most banking can now be done online, there can still be a need to physically visit a location which might have restricted business hours.
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.
The services that are offered by the banks are specifically tailored to the individual business. This is so that the business can receive the support that they need and require through a good banking experience. Having a good relationship with a bank will provide several benefits for the business in the long run.
Business banking also has a few requirements for characteristics. The first is authority, which is where anyone with a stake in the business can form a business bank account. The second is that business banking should have a degree of independence from the owners personal banking. However, this might not be the case in the instance of a sole proprietorship. In this case, sole proprietors are not recognized as independent business units. The final characteristic is liability, which relates to the separation between personal and business assets and whether or not they are separated.
FAQs About Business Banking
There can be several benefits of business banking, including financial protection, professionalism, organizing expenses, cash management, and opening checking and savings accounts. There are a range of banking services that bring different benefits.
Business banking is geared primarily towards smaller companies that want to have a separation between their business and personal expenses. Corporate banking is a type of banking that is often used by larger businesses to smoothly manage their financials.
Business online banking provides the same services as traditional business banking, it’s just done online. Many banks offer the ability to send and receive money, check account balances, and apply for credit through their online platform or app. Online banking services can make business banking more efficient.
A business banking rating relates to how well and efficiently a business is able to manage paying its bills. The criteria for a rating are based on the factors relating to how well a business bank account is managed.
WHY BUSINESS OWNERS LOVE FRESHBOOKS
SAVE UP TO 553 HOURS EACH YEAR BY USING FRESHBOOKS
SAVE UP TO $7000 IN BILLABLE HOURS EVERY YEAR
OVER 30 MILLION PEOPLE HAVE USED FRESHBOOKS WORLDWIDE