Retail banks serve individuals and families; commercial banks serve businesses

A retail bank is built to handle your personal money — checking accounts, savings accounts, mortgages, car loans, credit cards. A commercial bank is built to handle a business's money — business checking accounts, lines of credit for inventory, equipment loans, payroll services, cash management.

The difference matters because the two types of banks have different rules, different products, and different ways of deciding whether to lend you money. A retail bank asks about your job and your credit score. A commercial bank asks about your business's revenue, cash flow, and whether you have collateral to back the loan.

Many large banks do both. Chase, Bank of America, and Wells Fargo all have retail divisions (where you open a checking account) and commercial divisions (where a business owner goes to borrow money). But the two sides operate separately, with different staff, different lending standards, and different fee structures.

Key Takeaways

  • Retail banks focus on individual customers and offer checking, savings, mortgages, and personal loans; commercial banks focus on businesses and offer business accounts, lines of credit, and equipment financing.
  • Retail banks decide whether to lend based on your personal credit score and income; commercial banks decide based on your business's revenue, profit, and assets.
  • Many large banks have both retail and commercial divisions operating as separate units with different products and pricing.
  • Retail banks are insured by the FDIC up to $250,000 per account type; commercial banks have the same FDIC protection for business accounts.
  • If you are starting a business, you will need a commercial bank account even if you have been a retail customer for years — retail accounts are not legal for business use.

What each type of bank offers

Retail banks offer the products you use in daily life. A checking account to pay bills. A savings account to set money aside. A mortgage to buy a house. A car loan. A credit card. A personal loan to cover an unexpected expense. These products are designed for individuals and families, and the amounts are typically smaller — a mortgage might be $200,000, a car loan $30,000, a personal loan $5,000 to $50,000.

Commercial banks offer products designed for businesses. A business checking account that can handle hundreds of transactions a month. A line of credit — money the business can borrow and repay as needed, like a credit card but for a company. Equipment loans to buy machinery or vehicles. A term loan to expand the business or cover operating costs. Payroll services to pay employees. Cash management services to move money between accounts and locations. The amounts are typically larger — a line of credit might be $100,000, an equipment loan $500,000.

Some products blur the line. A small business owner might use a retail bank's personal credit card to pay for supplies, or a retail bank's personal line of credit to fund the business. But this is not the intended use, and it creates legal and tax problems. A business needs a business account, even if it is a sole proprietorship with one person.

How they decide whether to lend to you

A retail bank decides whether to lend to you based on your personal financial history. They pull your credit report, which shows every loan you have taken, every payment you have made or missed, and your current debt. They look at your credit score — a number between 300 and 850 that summarizes your payment history. They ask about your job and your income. They may ask for recent pay stubs or tax returns. If you want a mortgage, they will order an appraisal of the house to make sure it is worth what you are borrowing.

A commercial bank decides whether to lend to a business based on the business's financial history. They ask for the business's tax returns from the past two or three years. They ask for financial statements — documents that show the business's revenue, expenses, and profit. They look at the business's cash flow — whether money is coming in faster than it is going out. They may ask the business owner to personally may provide the loan, which means if the business cannot pay, the owner's personal assets are at risk. They may ask for collateral — equipment, inventory, or real estate that the bank can seize if the loan is not repaid.

The standards are stricter for commercial loans because the amounts are larger and the risk is higher. A retail bank might approve a $5,000 personal loan based mainly on your credit score. A commercial bank will not approve a $100,000 line of credit without seeing detailed financial statements and understanding exactly how the business will use the money.

Fee structures and account minimums

Retail banks typically charge lower fees and have lower account minimums. A checking account might have no monthly fee, or a fee of $10 to $15 if you do not maintain a minimum balance. Overdraft fees — charged when you spend more than you have — are usually $30 to $35 per overdraft. ATM fees for using another bank's machine are usually $2 to $3.

Commercial banks often charge higher fees because they offer more complex services. A business checking account might have a monthly fee of $25 to $50, or higher if the account is inactive. Wire transfer fees — used to move money between banks — might be $15 to $30 per wire. Overdraft fees might be higher. Account minimums are often higher too — a business account might require $2,500 or $5,000 to stay open, while a retail account might require nothing.

Some commercial banks offer tiered pricing, where fees go down if the business maintains a higher balance or does more business with the bank. A business that keeps $50,000 in the account and uses the bank's payroll service might pay lower fees than a business that keeps $5,000 and uses no other services.

Regulation and deposit insurance

Both retail and commercial banks are regulated by federal and state authorities. The Federal Deposit Insurance Corporation (FDIC) insures deposits at both types of banks up to $250,000 per account type, per person, per bank. This means if the bank fails, you get your money back up to that limit.

The limit applies separately to different account types. If you have a checking account with $200,000 and a savings account with $200,000 at the same bank, both are fully insured — the checking account is insured up to $250,000, and the savings account is insured up to $250,000. But if you have two checking accounts at the same bank with $200,000 in each, only one is fully insured; the other is only insured up to $50,000.

Business accounts have the same FDIC protection. A business checking account is insured up to $250,000. A business savings account is insured up to $250,000. They are counted separately, so a business with $200,000 in checking and $200,000 in savings is fully insured at both.

When you need a commercial bank account

If you are self-employed or own a business, you need a commercial bank account — even if your business is very small. The IRS expects business income to go into a business account, not your personal account. If you mix business and personal money, you make it harder to prove your income and expenses at tax time, and you lose the legal protection that comes from keeping the business separate from your personal finances.

You do not need to be incorporated to open a business account. A sole proprietorship — a business with one owner and no formal structure — can open a business account. A partnership can. An LLC can. You will need a business license or an Employer Identification Number (EIN), which you can get free from the IRS. Some banks will open an account with just a Social Security number and a business name, but most ask for an EIN.

The account will cost more than a personal account, and you will have fewer account options. But it is a legal and financial necessity, not an optional upgrade. If you are currently using a personal account for business, opening a business account should be one of your first steps.

Large banks versus community banks

The difference between retail and commercial banks is separate from the difference between large banks and small banks. A large national bank like Chase has both retail and commercial divisions. A community bank — a smaller bank that serves one region — also has both retail and commercial divisions.

Community banks often have more flexible lending standards for small businesses. A large bank might require three years of tax returns and detailed financial statements before approving a $50,000 loan. A community bank might approve the same loan based on a conversation with the owner and a review of the past year's bank statements. Community banks also tend to have lower fees for small business accounts, because they are competing for customers in a smaller market.

If you are starting a business or have a small business, it is worth talking to a community bank in your area. You may find better terms and more personal service than at a large national bank.

Frequently Asked Questions

Can I use a personal bank account for my business?

Legally, no. The IRS expects business income to go into a business account. Mixing personal and business money makes it harder to prove your income and expenses at tax time, and it removes the legal separation between you and your business. If your business is sued, a court might go after your personal assets if you have not kept the accounts separate.

Do I need to incorporate to open a business account?

No. A sole proprietorship, partnership, or LLC can all open a business account. You will need a business license or an Employer Identification Number (EIN) from the IRS. Some banks will open an account with just a Social Security number and a business name, but most require an EIN, which is free to obtain.

What is the difference between a line of credit and a term loan?

A line of credit is money you can borrow and repay as needed, like a credit card. You only pay interest on the money you actually use. A term loan is a lump sum you borrow all at once and repay over a fixed period, usually with monthly payments. A term loan is better for a one-time expense like equipment; a line of credit is better for ongoing needs like inventory.

Will my personal credit score affect my business loan?

Yes, especially for a new business. Most commercial banks ask the business owner to personally may provide the loan, which means they will check your personal credit score. As the business builds its own credit history, the business's financial performance becomes more important than your personal score.

Can I move my business account to a different bank?

Yes. You can close the account at one bank and open it at another. The process is simpler than moving a personal account because there are usually fewer automatic payments and deposits. Give the new bank your account information so they can help you set up transfers, and tell your customers and vendors about the new account details.