QS Study

Advantages and Disadvantages of Commercial Banks


Commercial banks can help a small business by making it easier to manage day-to-day financial tasks. An established commercial account with a bank will make it easier to borrow money when you grow your business. The Advantages of raising funds from a commercial bank are as follows:

(i) Banks provide timely assistance to business by providing funds as and when needed by it.

(ii) Secrecy of business can be maintained as the information supplied to the bank by the borrowers is kept confidential;

(iii) Formalities such as the ssue of prospectus and underwriting are not required for raising loans from a bank. This, therefore, is an easier source of funds;

(iv) Loan from a bank is a flexible source of finance as the loan amount can be increased according to business needs and can be repaid in advance when funds are not needed.


Commercial bank accounts are often more expensive than traditional bank accounts. Banks may charge fees for night deposits, for processing a certain number of checks and for the payroll services. The major Disadvantages of commercial banks as a source of finance are as follows:

(i) Funds are generally available for short periods and its extension or renewal is uncertain and difficult;

(ii) Banks make detailed investigation of the company’s affairs, financial structure etc., and may also ask for security of assets and personal sureties. This makes the procedure of obtaining funds slightly difficult;

(iii) In some cases, difficult terms and conditions are imposed by banks, for the grant of loan. For example, restrictions may be imposed on the sale of mortgaged goods, thus making normal business working difficult.

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