Overview of Short-Term Financing

Commercial Banks

Commercial banks A commercial bank (or business bank) is a type of financial institution and intermediary.

Commercial banks engage in the following activities: the processing of payments; accepting money on term deposit; lending money by overdraft, installment loan, or other means; providing documentary and standby letters of credit guarantees, performance bonds, securities underwriting commitments, and other forms of off-balance sheet exposures; and the safekeeping of documents and other items in safe deposit boxes.

Commercial banks provide several types of loans. A secured loan is when a borrower pledges an asset (e.g., a car or property) as collateral, which then becomes a secured debt owed to the creditor who gives the loan. The debt is thus secured against the collateral. If the borrower defaults, the creditor takes possession of the asset used as collateral and may sell it to regain some or all of the amount originally lent to the borrower.

Commercial banks may also provide unsecured loans, which are monetary loans that are not secured against the borrower's assets (i.e., no collateral is involved). Some examples of unsecured loans include credit cards and credit lines.

An overdraft is an example of an unsecured loan. An overdraft occurs when money is withdrawn from a bank account, and the available balance goes below zero. In this situation, the account is said to be "overdrawn." 

Suppose there is a prior agreement with the account provider for an overdraft, and the amount overdrawn is within the authorized overdraft limit. In that case, interest is normally charged at the agreed rate. If the positive balance exceeds the agreed terms, additional fees may be charged, and higher interest rates may apply.

Accessing funds through a commercial bank is a typical and common way of accessing funds when in need, particularly for small or entrepreneurial businesses.