Overview of Short-Term Financing
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. )
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.