Banks provide a number of important financial services to business:
Provide businesses with expansion capital. A secured loan is one that is guaranteed by some form of asset such as buildings and property. An unsecured loan is not backed in the same way. A bank will lend a business a given sum for a specified period of time e.g. £6,000 for 2 years. The business will then repay the capital sum in installments with interest added e.g. £360 per month. The rate of interest on unsecured loans is higher than for secured loans.
Services enable a business to transact its day-to-day affairs, for example paying wages into employees accounts, paying bills, and taking up periods of credit when applicable. Businesses are able to use bank services such as standing orders and direct debits to pay water, electricity, business rates and other regular bills.
Enable a business to have a short period of credit to smooth out cashflow difficulties. The business arranges an overdraft limit with its bank and is permitted to borrow up to the arranged overdraft ceiling. Interest is only charged on the amount overdrawn each day. So, for example if the bank was only overdrawn by £100 for 1 day of the year. Then it would pay 1/365 of annual interest rate for £100.
Cheques, credit cards and bank drafts
Enable a business to smoothly manage its day-to-day payments and transactions. Bank statements enable the business to keep a regular check on its accounting position.
The bank will also provide systematic and ongoing advice particularly to small businesses, and start ups. For example, the bank will provide detailed advice on how to construct and organise a business plan.
Banks also provide long-term finance in the form of mortgages for the purchase of land and property.
Merchant banks and issuing houses also support companies in the management of share issues for example by arranging for financial institutions to underwrite a new share issue.