Commercial Banking versus Traditional Banking for Businesses
Although commercial banking and traditional banking have some similar characteristics, there are significant differences between these two aspects, particularly when they deal with business loans. Industry experts refer to traditional banks as the original banks considering their functionalities. In fact, traditional banks were formed to offer checking accounts. Playing a major role in the economy, traditional banks did their best to bring household incomes to the circular flow. They accept savings deposits from customers and invest them in potential projects.
Both commercial banks and traditional banks accept deposits from investors. In return, both these institutes offer an interest payment and the guarantee of the safety of the money. Both the banks utilize these deposits to make loans for businesses and personal applicants. Borrowers should repay the obtained loan as installments (calculated with the interest of course) within the agreed time period. This interest is among the primary income sources of both the bank types.
Interests of the traditional banks are lower compared to commercial banks. One of the main characteristics of traditional banking is that it facilitates more restricted access to credit facilities. They demand a lengthy documentation process and property as collateral upon issuing loan facilities. Although traditional banks entertain lower interest rates than the private lenders, many businesses decline to accept traditional banks as a funding source considering the prolonged processing time and strict conditions.
Commercial banking is relatively business focused
Compared to traditional banking, commercial banks have diversified services to offer. In fact, commercial banks intend to promote their loans and services for businesses involved in various industries other than focusing on residential mortgages. In addition to that, commercial banks have relatively fewer restrictions on offering unsecured loans such as credit cards too. Although commercial banks have no legal restrictions to offer residential mortgages, they prefer to serve the needs of companies that are involved in regional and national levels.Although the interest rates are higher compared to traditional banking, commercial banks offer loans to businesses on more flexible terms. Since their intention is to help businesses to grow and profit more in the future, commercial banks tend to offer business consultancy, too. However, their rates are relatively lower than the private lenders.
The documents commercial banks demand to offer business loans
Different banks demand different types of documentation to verify the eligibility of the applicant (business). However, in general, commercial banks may ask for financial statements of the most recent two to three years (if available), a couple of years’ personal tax returns of the applicant (the owner) or of the business, perfectly updated profit and loss balance sheet, etc. These are among the most essential document.
Types of Collateral accepted
Banks generally accept commercial buildings, inventories, residential buildings, life insurance policies, equipment, receivable accounts and many other assets before releasing a business loan. As per the current trends, however, commercial banks have become more flexible with their terms and conditions. This flexibility is also a result of the huge competition among various institutes out there in the finance industry.