Finance Essay Example | Topics and Well Written Essays - 1000 words - 5

Finance - Essay Example To conduct this purpose commercial banks tend to lend money to private individuals as well as organizations so these individuals and organizations can use this money to make further investments and conduct expenses. Another purpose of such banks is to accept deposits made by individuals and organizations (Viney, 2009, p.50). Commercial banks even conduct several secondary functions which include: creation of credit, funds transfer and services that are general in nature. Sources and Use of Funds The main source of finance for commercial bank which contributes heavily to its cash inflow is deposits. Deposits are regarded as the money that a particular commercial bank’s account holder transfers to the bank for the purpose of safekeeping in order to use this money whenever the account holder needs it. These deposits are added by two kinds of account holders, these include those who have a saving account and who hold a current account. Other than deposits, commercial banks even at tain funds through the act of borrowing money. Commercial banks do not normally borrow money but in order to respond to short term financing needs it borrows money from other banks or they even borrow money through the Federal Reserve (Madura, 2011, p.442). Banks even earn money through by charging for the various services it provides to its account holders from those who have borrowed money. Those who borrow money pay interest which is the return that commercial banks attain for providing the service of borrowing money. Commercial banks even obtain finances by putting up its stock for sale on the stock market; this is mostly done when the bank wants to expand in size. There are different uses of a commercial bank’s funds, they primarily use their funds in order to lend money and this is the main way through which they earn profit for their services. These loans are provided for a particular period of time and the bank charges a fixed rate of interest on these loans and in or der to provide loans, they obtain collateral in shape of property and assets from the borrowers (Viney, 2009, p.60). In most cases the collateral is the asset that is being financed by the commercial bank itself. These loans are provided for the purpose of consumer lending and organizational lending. Another primary use of the funds of banks includes purchase of securities that are short term in nature. Banks even use their funds to conduct activities that are not stated on the balance sheet of the bank. These activities include: forward contracts, standby letter of credit and others. Commercial Banks and Businesses Commercial banks are of great importance to any business or organizations. The main way in which a business uses a commercial bank is that a commercial bank is a source of finance for a business. Both large organizations as well as small and medium sized organizations rely on commercial banks for financial purposes. There are several reasons due to which a business may b orrow money from a particular commercial bank. Businesses obtain loans for the purpose of commercial mortgages, this means that when a business wants to purchase a new building or a factory or any other asset it resort to commercial mortgages. Businesses even obtain loans for the purpose of the purchase of new equipments so the business can obtain equipments and machinery in order to remain competitive in the market (Madura, 2011, p.450). A major reason due to which organizations borrow