Commercial Banking: What Online Businesses Need to Know
Like any business, online businesses secure funding to maintain their cash flow. In fact, recent figures show that 82% of businesses failed due to cash flow problems, and 38% ran out of cash entirely.
One challenge online businesses face when seeking funding is where to access it. On top of their choices, commercial banking is among the most reliable. It offers a wide range of banking services to fund and financially support businesses of varying sizes.
Understanding Commercial Banking
Commercial banking has two definitions. First, it refers to any private banking institutions or, in literal terms, banks engaged in commerce. Note that this definition is broad and less commonly used.
Second, the more widely embraced definition of commercial banking is any operation, facility, and banking product offered to businesses, institutions like colleges and universities, or government agencies to help them grow and profit. This is also called corporate banking.
Commercial banking isn’t typically offered to individual account holders or the general public. Instead, personal or retail banking caters to these groups. This financial institution helps them meet and manage their “personal” finances.
In particular, personal banks offer (but aren’t limited to) deposit accounts, secured individual lending, unsecured individual lending, certificates of deposit, and cash access. They also provide unique services such as transaction account no fees and retirement accounts (IRAs). In addition, leveraging IT services for banking can enhance digital banking experiences and improve operational efficiencies for businesses looking to streamline financial processes.
Like personal banks, commercial banks offer deposit accounts, secured and unsecured lending, and cash access. However, they also provide business-tailored products, such as programs like payment management, foreign exchange services, and equity financing.
These business-specific financial services are one reason online businesses are recommended to opt for commercial banking over personal banking. Although these businesses are often run by a single individual, making them eligible for personal financing, commercial banking provides solutions better suited to the complexities of running a business.
Key Banking Services for Online Businesses
As stated, commercial banking also offers checking or savings accounts. Although many businesses can operate without these business-specific accounts, such as sole proprietorships or limited liability companies (LLC), they’re highly recommended.
One benefit of getting a business checking or savings account for online businesses is easier tax season. In most cases, if owners use their own personal bank accounts, they have to file two sets of taxes: one for their business and another for personal. If they miscalculate their tax, they can easily get penalised for “unintentional” tax evasion.
When choosing a commercial bank account, the US Chambers of Commerce recommends a low-interest online bank that offers a high-yield savings account with low monthly fees. In addition to better rates, an online bank is often managed through a mobile app with helpful features, like cash flow management and accounting tools.
Moreover, commercial banking also offers payment-related business support services and equipment under the umbrella term merchant services. One example of these is payment gateways, which authenticate and securely transmit payment data from customers to businesses (or vice versa). They strictly follow PCI DSS compliance standards, making them a safe way for online companies to accept online payments.
Another essential commercial banking service for online businesses, especially those with international customers, is its cross-border payments and foreign exchange services. They help expand their global reach effectively and mitigate the risks of fluctuating foreign currencies.
Choosing the Right Commercial Bank for Your Business
The right commercial bank for an online business should meet its needs and preferences. Besides this, commercial banks with digital banking features like mobile responsiveness, user-friendliness, and security are recommended.
Opt for commercial banks with low fees. Depending on the bank, these charges can usually be reduced or totally avoided by opening an online business bank account or asking the bank if there’s a way to waive them, such as overdraft protection.
Lastly, opting for commercial banks with responsive customer support that understand online businesses’ nuances is also advised. In an online environment where downtime or transaction delays can result in lost revenue or customer dissatisfaction, having knowledgeable support is essential to maintaining seamless operations and addressing issues quickly.
Risk Management and Fraud Protection
Nowadays, fraud detection and management is the new competency standard for banks. They implement it using identification technology (e.g., two-factor authentication and encryption), analytics technology (e.g., pattern recognition and data matching), and workflow technology (i.e., software that streamlines alerts from other technologies for businesses, compliance officers, and analysts).
All of these innovations are helpful for businesses operating in an online environment where fraud, despite emerging laws, is still prevalent. Hence, it’s also highly advised to opt for commercial banks with cybersecurity tools, such as tokenization (i.e., technology that replaces sensitive information, like card numbers, with unique tokens during transactions to prevent exposure of actual data) and Secure Sockets Layer (SSL) certificates.
Final Thoughts
Commercial banking meets the business-related financial needs of an online business. It offers not only funding but other services helpful for running an online business, such as merchant services and international transactions. Experts recommend low-interest, low-fee, high-yield business accounts with functional financial management and cybersecurity tools. For more in-depth and personal advice, seeking professional help is recommended.
