Must Know Roles of Banks in Small Business

Banks play an important role in business.

They provide access to capital that entrepreneurs need to get their ventures off the ground, make day-to-day operations smoother and help manage cash flow and finances.

Financing: Businesses can get essential financing from banks in two ways: traditional loans, and overdrafts.

Through these financing options, businesses can access the capital they need to grow and invest in their future.

Cash Management: Banks offer a wide range of cash management services designed to help businesses better manage their finances.

This includes services such as setting up business accounts, international payments, and cash flow management.

Payment Processing and Merchant Services: Banks allow businesses to accept payments from their customers by providing a range of payment processing and merchant services.

This allows businesses to process payments quickly, securely, and reliably.

Risk Management: Banks provide a variety of risk management services that can help businesses protect themselves from fluctuations in currency, interest rates, and other variables.

Advisory Services: Banks also offer advisory services that can help them make better decisions about how to manage their finances and grow their business.

This includes advice on taxation, investment opportunities, and business operations.

Type of loans Banks provide to Businesses

Banks provide various types of loans to businesses depending on their need.

SBA Loans

These are loans backed by the Small Business Administration and offer competitive interest rates and extended repayment terms.

Small Business Administration (SBA) loans are available to eligible small businesses in India through SBA-certified lenders in the United States.

These lenders work with organizations like the Export-Import Bank of India or State Bank of India to provide credit and financing options to Indian businesses.

SBA loans are guaranteed by the U.S. government and provide competitive terms and rates for startup companies, established businesses, and those in the process of exporting.

These loans can be used for working capital, inventory, and purchases of machinery and equipment.

The SBA also works with its partners to provide counseling and technical assistance services to Indian businesses.

Line of Credit

A Line of Credit allows businesses to draw funds when needed and only pay interest on the amounts taken, rather than the full balance of the Loan.

A line of credit is different from a loan in that it is open-ended and can be used multiple times, with the amount available varying depending on the amount still owed.

Interest is typically charged on the outstanding balance, making a line of credit repayable like a loan.

A line of credit can be secured or unsecured, with a secured line of credit requiring some form of collateral to be put up in order to secure the loan.

Lines of credit are most commonly used to help with short-term financing needs, though they can also be used for long-term financing such as commercial and residential real estate purchases.

People may also use a line of credit to access funds for emergency expenses or to buy big-ticket items such as appliances.

Equipment Financing

Banks provide financing for the purchases of business-essential equipment like computers, office furniture and industrial machinery.

The funding may be either secured or unsecured, with the former providing better rates and terms.

It is important for business owners to structure their equipment financing agreements in a way that best meets their needs.

This may involve negotiating rates, terms, and repayment schedules.

Additionally, business owners should consider whether they want to finance the entire cost of the equipment, or just a portion.

It is important to understand the repayment terms associated with the loan before signing any agreement.

Banks may also offer leasing options if the borrower’s needs do not fit a traditional loan product.

Term Loan

Term loans provide small businesses with a fixed sum of money that they are obligated to pay back in regular intervals, such as monthly or quarterly.

It is similar to a traditional bank loan, in that it carries an agreement for the borrower to repay the loan in installments or a lump sum, usually with interest.

It may also require collateral as security for the loan, depending on the terms of the loan agreement.

The term of a term loan can vary, but usually ranges from one to 10 years.

Common uses for a term loan include business expansions, acquisitions, renovations, and other large-scale investments.

Merchant Cash Advance

Merchant Cash Advance is a loan that is secured by the business’ future credit card sales.

A merchant cash advance from a bank is a form of financing that can give business owners access to cash quickly.

This type of loan is based on the future credit card sales of the business and is given in exchange for a set percentage of future credit card sales.

The advance amount is given upfront, but must be repaid through a set percentage of future credit card transactions.

This type of financing is popular among businesses that need capital quickly and prefer not to take on additional debt or rely on slow-to-pay customers.

It is important to note the cost of a merchant cash advance from a bank may be higher than a traditional business loan.

Business Credit Card

Business Credit Cards are issued by banks and allow businesses to make purchases with credit, with interest payments due at the end of each billing cycle.

A business credit card is a type of credit card designed specifically for business use.

These cards typically offer special features and benefits, such as rewards and discounts, to businesses that use them.

Most business credit cards also offer higher spending limits and more lenient repayment terms than traditional personal credit cards.

Business credit cards are an ideal form of payment for purchasing goods and services related to a company’s day-to-day operations.

Invoice Factoring

Invoice factoring with a bank is not a common practice, as most banks typically offer loan products such as lines of credit or traditional term loans.

However, some banks may offer certain types of invoice factoring services, although they are generally not as comprehensive as those offered by specialized invoice factoring companies.

In some cases, banks may offer the ability to “sell” your invoices to the bank in exchange for a lump sum of cash.

Cash Management Services

Cash management services of banks for small businesses can provide the following features:

Cash flow forecasting: Banks can track sales and expenses, make cash flow forecasts, and give recommendations on short-term investments or loan needs.

Automated payments: Automating payments allows businesses to set up and track payments, saving time and money.

Collections and receivables: Banks can help manage accounts receivables and collections, improving cash flow.

Online banking services: Banks can provide secure and efficient online banking services for small businesses.

Merchant services: Banks can provide credit and debit card processing services at lower rates than traditional processors.

Credit card management: Banks can help small businesses manage credit cards, providing insights and analysis regarding individual cards, payment history, and credit scores.

Cash pooling: Banks can assist in establishing cash pooling measures, consolidating cash investments.

Sweep accounts: Sweep account services enable small businesses to move available cash balance into high yield accounts, generating extra income without a minimum balance requirement.

Risk Management

There are various risks that a business face on a daily basis. Businesses can use various risk management schemes of a bank to mitigate a few of those risks.

Business Insurance: Banks can provide small businesses with business insurance policies to help them protect against losses due to unforeseen risks.

Banks can also provide guidance on selecting appropriate coverage and managing insurance risk.

Credit Risk Analysis: Banks can offer credit risk analysis services to small businesses to help assess the potential risk of providing credit to clients.

This allows businesses to make informed decisions about borrowing and cover potential losses if customers fail to fulfill their obligations.

Advisory Services

Banks can offer a wide range of advisory services to businesses. Some of these services are –

International Trade Finance: Banks can provide international finance solutions to help businesses buy and sell goods or services abroad.

This could include secure foreign exchange services, export/import finance, and other trade finance services.

Investment Banking Services: Banks can offer businesses a wide range of investment banking services, including equity underwriting, mergers and acquisitions, restructuring, and capital raising.

Business Consulting: Banks can provide businesses with strategic and operational assessments, market intelligence, and financial planning services.

Various types of Banks and Services they provide

There are several types of banks based on the type of predominant transaction they engage in.

Commercial Bank: Offers basic banking services such as check and deposit accounts, loan products, cash management services and credit lines.

Online Bank: Provides convenient access to accounts, transfers, and loans for small businesses through its website.

Community Bank: Proprietary banks which focus on providing financial services to the local community, offering services such as loan products, checking and savings accounts, credit cards and lines of credit.

Credit Union: Cooperative banks which offer competitive rates on loans and other services, such as checking and savings accounts, debit cards, and ATM access.

Investment Bank: Provides specific products and services to businesses and high-net-worth clients, including underwriting, corporate finance and merger and acquisition advice.

Specialty Bank: Focuses on specialized financial services such as international banking, asset management and trade finance.

Regional Bank: Offer commercial and retail banking services, including credit and debit cards, ATMs, and cash management.

Private Bank: Offers personalized banking services to individuals, families, trusts and charities, such as discretionary asset and wealth management.

Role of RBI in business

The Reserve Bank of India (RBI) plays a central role in the regulation and management of India’s financial system.

Among a slew of public duties, its role includes –

  1. Setting and administering monetary policy (including interest rates and the money supply)
  2. Regulating, controlling and supervising banks and financial institutions
  3. Advising the government and other regulators on banking and financial sector issues
  4. Acting as a lender of last resort; acting as a banker to the government
  5. Managing the exchange rate of the Indian rupee.

The main objective of RBI is to ensure price stability and render financial stability.

The Reserve Bank of India also plays a vital role in facilitating economic growth.

It introduces policies aimed at curbing inflation and creating an enabling environment for businesses to operate and grow.

More specifically, RBI’s role in the business environment includes:

• Setting monetary policy that dictates the rate of interest in the economy.
• Regulating the banking sector, setting lending norms, and directing banks to advance loans to priority sectors such as agriculture, small and medium enterprises, etc.
• Enacting regulations to ensure smooth functioning of payment and settlement systems.
• Regulating capital markets and acting as the securities regulator.
• Storing and issuing currency notes.
• Providing refinancing facilities to commercial banks and state co-operative banks.
• Supervising and issuing licenses to non-banking financial companies.
• Acting as banker to the government.
• Acting as the debt manager for the central and the state governments.
• Allowing foreign investments into the country by relaxing rules and regulations.

Awareness about the Reserve Bank of India (RBI) helps small businesses to gain an understanding of the initiatives, policies, and regulations that have been implemented by the central bank to promote and protect their interests.

For instance, RBI has launched several targeted credit schemes to improve levels of credit availability to micro, small and medium enterprises (MSMEs).

Additionally, the RBI has set up a Small Industries Development Bank of India (SIDBI) to ensure greater access to funding to MSMEs.

Moreover, RBI has launched a number of initiatives to encourage and enable digital transactions among MSMEs, reducing the need for cash payments and physical cheque transactions.

Through awareness of the various policies and regulations set by the central bank, small businesses are better equipped to make strategic decisions to strengthen their operations and businesses.

Keeping Up With Economic Regulations in Banking

Keeping Up with the Economic Regulations of Banking for small businesses

Comply with Anti-Money Laundering (AML) Regulations: Small businesses must implement policies and procedures designed to detect and report suspicious activity.

These policies should define certain “red flags” that may signal an attempt at illegal activity, such as large or frequent payment transactions or international payments.

Comply With Know Your Customer (KYC) Requirements: Businesses must know their customers to comply with KYC requirements.

This includes verifying customer identity, conducting background checks and monitoring customer transactions for any suspicious or high-risk activity.

Adopt Safe Banking Practices: Adopt practices to ensure their accounts are secure.

This includes protecting passwords, implementing two-factor authentication and regularly monitoring accounts for unauthorized transactions.

Understand Bank Secrecy Act (BSA) Requirements: The BSA requires financial institutions to report certain cash transactions and identify customers who pose a potential threat of money laundering or terrorist activity.

Financial institutions must establish and maintain customer identification programs and must report suspicious activity to the appropriate governmental agency.

Stay Up to Date on Regulatory Changes: Regulatory standards and reporting requirements can change quickly.

It is important for small business owners to stay up to date on these changes as they can have a significant impact on the financial operations of their business.