What is business banking (short definition)
Business banking—also called commercial or corporate banking—covers the financial accounts and services a bank provides to companies rather than to individual consumers. These services are tailored to business needs: deposits and payments, borrowing for growth or assets, tools to manage cash flow, payroll processing support, and protections against fraud.
Core concepts and jargon (defined)
– Retail bank: a bank that mainly serves individuals (consumer banking).
– Investment bank: a bank that focuses on capital markets, underwriting, and advisory services.
– Deposit accounts: checking and savings accounts used to hold a company’s cash.
– Line of credit: a flexible borrowing facility that a company can draw on up to a preset limit.
– Asset-based loan: a loan secured by company assets such as inventory or receivables.
– Equipment lease/loan: financing specifically to acquire machinery or equipment.
– Receivables: money owed to a company by its customers.
– Payables: money a company owes to suppliers or creditors.
– Treasury (cash) management: services that optimize how a company collects, holds, and disburses cash.
– ACH (Automated Clearing House): a U.S. electronic network for batch-moving payments (e.g., payroll, vendor payments).
– Fraud insurance/protection: bank services and policies that limit losses from unauthorized transactions or check fraud.
What business banks do (overview of main services)
– Deposit accounts and payments: Business checking and savings accounts for day‑to‑day cash handling and reserve balances.
– Lending and capital: Fixed-term loans, short- and long-term financing, lines of credit, and asset-based lending to support expansion, acquisitions, equipment buys, or working capital.
– Cash/treasury management: Systems and processes to speed collections and payments, improve liquidity (having cash when needed), and automatically sweep idle balances into interest-bearing accounts. Banks often provide online dashboards that give real-time visibility into balances and transactions.
– Payroll support: Software or services to calculate and distribute payroll, manage tax withholdings, and reduce administrative burden—especially valuable for smaller firms that lack in-house bookkeeping.
– Fraud mitigation: Tools and insurance-like protections against account fraud, counterfeit checks, and internal fraud resulting from overly broad access to corporate accounts.
– Industry specialization: Some banks focus lending and services on specific sectors (e.g., agriculture, construction, commercial real estate) and can tailor underwriting and products accordingly.
Institution types and historical note
Banks may specialize (retail, commercial, or investment) or operate all lines of business under one roof. U.S. rules that once forced a strict separation between commercial and investment banking were relaxed in the late 1990s. Over recent decades the number of commercial banks in the U.S. has fallen, largely through mergers and acquisitions; the largest banking organizations now combine business, consumer, and capital‑markets activities.
Practical checklist — what to evaluate when selecting a business bank
– Services match: Does the bank offer the deposit, lending, and cash-management products you need?
– Lending capacity: Can the bank underwrite the size and type of loan your business may require?
– Cash-management tools: Does it provide ACH, automated sweeps, and a real‑time online platform?
– Payroll options: Are payroll services integrated or available at reasonable cost?
– Fraud safeguards: What protections, monitoring, and recovery options are offered?
– Industry expertise: Does the bank understand your business sector’s cash flows and asset types?
– Fees and pricing: Are account fees, transaction charges, and loan costs transparent?
– Relationship model: Will you have a dedicated business banker or team for support?
Step-by-step setup (simplified)
1. List your needs: expected balances, payment volumes, borrowing plans, payroll frequency.
2. Shortlist banks that serve businesses of your size and industry.
3. Compare product features, platforms, and fee schedules.
4. Open accounts and register online treasury tools.
5. Set up ACH/payroll and determine sweep rules for idle cash.
6. Implement fraud controls: access limits, dual-authorization, and check/security features.
7. Review periodically and adjust credit or cash-management settings as business changes.
Small worked example — using a cash sweep to earn interest
Assumptions
– Company keeps $100,000 in checking on average each month.
– It needs $20,000 available daily for operations.
– The remaining $80,000 can be swept into an interest-bearing account that earns an annual rate of 1.2% (assumed rate for demonstration).
Calculation
– Annual interest on swept funds =
= $960 per year.
Breakdowns and sensitivity
– Monthly: $960 / 12 = $80 per month.
– Daily average: $960 / 365 ≈ $2.63 per day.
– Return relative to total cash held ($100,000): $960 / $100,000 = 0.96% effective yield on overall cash (because $20,000 remains non-swept for operations).
If assumptions change:
– If operational float falls to $10,000, swept funds = $90,000 → annual interest at 1.2% = $1,080.
– If the sweep rate rises to 2.5%, swept funds $80,000 → annual interest = $2,000.
– If the bank charges a sweep fee of $5/month, net annual benefit = $960 − ($5×12) = $900.
Practical checklist to implement a cash sweep
1. Confirm liquidity needs: quantify minimum daily/weekly balance required for operations and payroll.
2. Choose sweep vehicle: internal interest-bearing account, money market deposit account (MMDA), or sweep to a partner bank/money-market fund. Note differences in liquidity and insurance.
3. Check interest rate and compounding: verify nominal rate, compounding frequency, and how the bank calculates daily balances.
4. Ask about fees and minimums: account maintenance, sweep setup, per-transaction fees, or tiered-rate thresholds.
5. Verify insurance and risk: confirm FDIC insurance limits or fund prospectus coverage if using non-deposit products.
6. Authorize and test: set rules, run a controlled test cycle, and confirm automatic movement and availability timing.
7. Monitor and reconcile: review sweeps, interest posted, and any missed transfers at least monthly; adjust sweep amounts as cash needs change.
8. Tax and recordkeeping: record interest income; keep statements for reporting.
Key caveats and assumptions
– Calculation assumes a constant swept balance of $80,000 and a fixed annual rate of 1.2% with no fees. Real balances fluctuate and banks may change rates.
– Liquidity timing matters: same-day availability vs. next-business-day can affect whether swept cash can meet urgent needs.
– Insurance: FDIC insurance applies to deposit accounts up to coverage limits and depends on account ownership categories. Sweeps to money market mutual funds are not FDIC insured and carry different risks.
– Taxes: interest earned is taxable as ordinary income; consult your accountant for business tax treatment.
Worked-numeric recap (compact)
– Starting checking average: $100,000.
– Operational float: $20,000 (not swept).
– Swept amount: $80,000.
– Sweep rate: 1.2% annually → interest = $80,000 × 0.012 = $960/year → ≈ $80/month.
– Subtract annual fees to get net benefit.
Where to read more (reputable sources)
– Investopedia — Business Banking overview: https://www.investopedia.com/terms/b/business-banking.asp
– Federal Deposit Insurance Corporation (FDIC) — Deposit insurance basics: https://www.fdic.gov/resources/deposit-insurance/
– U.S. Small Business Administration — Managing business finances: https://www.sba.gov/business-guide/manage-your-business/manage-your-finances
– Internal Revenue Service (IRS) — Taxable interest: https://www.irs.gov/taxtopics/tc403
– Federal Reserve — Payment systems and cash management resources: https://www.federalreserve.gov/paymentsystems.htm
Educational disclaimer
This is educational information about cash-sweep mechanics and simple arithmetic examples, not personalized financial or tax advice. Consult your bank, accountant, or a licensed advisor before implementing sweep arrangements.