Historically, commercial banking has been the cornerstone of the banking industry. The primary goal of banking has always been to channel household savings into profitable business ventures, fostering economic growth and development. Over time, the types of products and services offered by banks to their commercial clients have evolved significantly, driven by changes in market demands and advancements in financial technology.
As the financial landscape has transformed, new banking products have emerged, while some older products have become obsolete. This article explores the range of banking products and services currently available to commercial clients, highlighting how banks continue to adapt to the changing needs of businesses in today’s dynamic economic environment.
Industrial Credit
Lending to large industrial companies has traditionally been the core activity of commercial banks. Corporations in any country typically seek to borrow funds under favorable conditions, and banks have long been able to meet this demand through their lending offerings.
However, with the growth and evolution of the debt market, the idea that banks are the primary source of financing for major businesses has become outdated. Large corporations now can raise capital directly from the markets, bypassing banks as intermediaries. By issuing bonds or other debt instruments, these companies can often secure funding at a lower cost, as they avoid paying the fees and interest typically charged by banks.
As a result, banks have seen a decline in their traditional lending business over the past century. In response, many banks have shifted their focus, creating specialized teams to assist clients with issuing debt securities and providing capital market services. Leveraging their long-standing expertise in the debt markets, banks now charge fees for offering advisory services, helping large companies navigate complex capital market transactions. Today, one of the main products banks offer to large firms is guidance in accessing and structuring debt in the capital markets.
Project Funding
Historically, banks have been the primary source of loans for large businesses seeking project financing. When a business undertakes a project that requires funding, the bank typically provides the financing directly. If the project defaults, the parent company behind the project has limited accountability for the losses.
For example, imagine a bank finances the DEF project launched by ABC Corporation, but the project eventually declares bankruptcy. In this scenario, the bank can only claim the assets tied to the DEF project itself, not those of ABC Corporation. The parent company, ABC Corporation, bears no responsibility for covering the losses incurred by the bank on the financing of the DEF project. Essentially, the project is treated as a separate entity, with its financial risks and liabilities.
This structure has allowed businesses to isolate project risk, ensuring that the parent company is shielded from financial exposure if a particular project fails. However, as financing markets evolve, there are now more sophisticated ways of structuring such deals, often involving multiple stakeholders, to spread and manage risk more effectively.
Loans Syndicated
Banks often form syndicates to provide large loans to companies when the amount exceeds what one bank can handle alone, as it would involve too much risk. In these cases, one bank acts as the “lead financier,” coordinating the loan and managing payments. The lead financier receives extra compensation for this role and ensures that the company makes all payments to them. The lead then distributes the payments to the other banks in the syndicate based on their share of the loan. This structure allows companies to secure large loans while spreading risk among multiple banks.
Renting
Many businesses have turned to leasing as a financing option since off-balance-sheet financing became available. Leasing allows companies to gain control over assets without having to reflect them on their balance sheets. Banks play a significant role in the financial leasing industry, particularly for businesses looking to acquire large assets such as vehicles, factories, real estate, or equipment. It’s important to note that banks typically finance *financial leases*, not *operational leases*, which involve different structures and accounting treatments.
Finance for International Trade
Multinational corporations dominate the global business landscape today, with their commercial activities extending well beyond national borders. As a result, international trade has become routine and largely unrestricted. This shift has created specific financing needs for businesses engaged in foreign trade. Traditionally, banks have specialized in providing the necessary financial support for these activities. Today, banks offer a range of services to facilitate international trade, including export finance, bank guarantees, letters of credit, and other financial products designed to reduce risk and ensure smooth transactions across borders.
Exchange Bills
Bills of exchange are commonly used by businesses for managing accounts payable and receivable. For example, Company A and Company B might sign a bill of exchange, specifying that Company A will be paid at a later date. Company A can then take this bill to a bank to have it discounted.
When a bank discounts a bill of exchange, it takes over the right to collect the receivable from Company B. The bank purchases the bill at a reduced price, meaning it pays Company A less than the bill’s face value. The difference between the face value of the bill and the price the bank paid is the bank’s profit or interest earned.
Bill discounting is a key service offered by banks to many commercial businesses. It helps streamline their accounts receivable processes by providing immediate cash flow, allowing businesses to avoid waiting for payment while the bank assumes responsibility for collecting the amount due.
The list provided above is by no means exhaustive. Banks offer a wide range of additional services to their business clients. To meet the unique needs of clients who represent a significant portion of their business, banks may even create new or customized financial products tailored to specific requirements. This flexibility allows banks to adapt to the evolving demands of businesses and provide solutions that support their growth and operations.
