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In this section, you will learn the options companies have when they need to borrow for a short period. Imagine if you are a caterer who just got your first big corporate job. You need to buy ingredients and hire workers before the event. The company will pay you when you invoice them after the event. Where do you get the cash to allow you to accept the job before getting paid? What are your options for financing if your business is seasonal?

Commercial Banks

A commercial bank lends money, accepts time deposits, and provides transactional, savings, and money market accounts.


Learning Objectives

  • Sketch out the role of commercial banks in money lending

Key Takeaways

Key Points

  • Commercial banks may provide a secured loan, which are monetary loans that have borrower collateral pledged against their repayment.
  • 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).
  • Accessing funds through a commercial bank is a very common way of accessing funds when in need, particularly in the case of small or entrepreneurial businesses.

Key Terms

  • collateral: A security or guarantee (usually an asset) pledged for the repayment of a loan if one cannot procure enough funds to repay. (Originally supplied as "accompanying" security. )
A commercial or business bank, is a type of financial institution and intermediary that lends money, accepts time deposits, and provides transactional, savings, and money market accounts.


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 a number of loans. A secured loan is when a borrower pledges some asset (e.g., a car or property) as collateral for it, which then becomes a secured debt owed to the creditor who gives the loan. The debt is thus secured against the collateral. In the event that 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". If there is a prior agreement with the account provider for an overdraft, and the amount overdrawn is within the authorized overdraft limit, then interest is normally charged at the agreed rate. If the positive balance exceeds the agreed terms, then additional fees may be charged and higher interest rates may apply.

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