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Commercial banks have traditionally been the backbone of banking. The bank was established to channel idle household resources for productive use in businesses. During the long existence of the bank, the nature of the products offered to corporate customers has changed greatly. Several types of new products have been introduced to meet the changing market needs, and some old products have become obsolete. In this article, we have listed the products currently offered by banks to their corporate customers.
The main activity of commercial banks is to make loans to large industrial enterprises. Companies from any country are interested in obtaining debt on favorable terms. The bank is able to meet this demand through the services it provides. Although with the development of debt markets, the idea of considering banks as the main source of debt has become obsolete when it comes to large corporations.
Mega corporations can raise capital directly from the market. It turns out cheaper because they don’t have to pay any middlemen, i.e. the bank. As a result, over the past century or so, banks have seen their core business decline. To combat this decline, they have established specialist teams that provide capital markets services and assist their debt securities issuance clients. Banks have centuries of experience in dealing with debt markets and can therefore offer their expertise for a fee. As a result, debt market advice has become one of the main products that banks sell to large corporations.
Project finance is a form of lending on which large corporations have depended largely on banks until now. In the case of project financing, the banker funds the project as an individual institution. The parent company sponsoring the project has limited liability if the loan fails.
For example, if a bank financed a DEF project initiated by ABC Corporation and the project failed over time. In this case, the banks only have access to the assets held by the DEF project. ABC Joint Stock Company is not responsible for losses incurred by the bank in financing the project. The project is treated as a separate entity in its own right.
Banks often combine to make huge syndicated loans to corporations. This is because the debt requirements of a particular corporation, let’s say, General Electric, may be so huge that any single bank may not be in a position to fulfill them without creating a significant risk on their books. Hence, in such cases, several banks have to form a syndicate to fulfill the loan requirement.
One bank may play a lead role in coordinating with other banks and making the funds available to the corporation. Hence, this bank would be called the “lead financier” and would be entitled to a special fee over and above the regular interest that is earned on the loan. In addition, the company will service the loan, i.e. it will only make payments to this bank. The head will have to create a mechanism to redistribute the monthly payments accordingly to other banks.
With the advent of off-balance sheet financing, many companies have begun to use leasing as a funding method. Indeed, it makes it possible for you to control said assets without taking advantage of a given company’s balance sheet. Banks are heavily involved in this leasing activity.
Financial leases are entered into by companies to purchase real estate, automobiles, plant equipment, or other major fixed assets. It should be noted that banks generally only contract for finance leases, not operating leases.
Foreign trade finance
Many companies in the world today are multinationals. Thus, their business interests transcend national borders. This means that foreign trade is rampant and has become the norm. However, foreign trade has specific financial needs. Banks have traditionally specialized in this type of financing. Also in the modern world, banks provide letters of credit, export financing, bank guarantees and other similar services to businesses that help them conduct foreign trade efficiently.
Bills of Exchange
Companies often use bills of exchange for accounts receivables and accounts payables purposes. For instance if company A agrees to pay company B at a later date, they could sign a bill of exchange for the same. Company A can then take this bill of exchange to the bank to get the bill discounted. This means that the bank will take over the right to collect receivables from B.
They will do so by purchasing the bill at a discount. This means that they will pay Company A a reduced amount on the bill. The difference between the face value of the bill of exchange and the discounted price at which the bank purchases it is considered the interest earned by the bank. Invoice discounting is an important service that banks provide to many commercial companies. This service helps them streamline accounts receivable processes.
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