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Glossary of Terms: Commercial Banking

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Have you ever had a conversation with your banker and felt as though he or she were speaking a different language? Banking terminology can be confusing, especially to people who are new to the commercial banking world. Read on for definitions of common commercial banking terms, so the next time you talk to your banker, you’ll be speaking the same language.

Annual Percentage Rate (APR)

The yearly rate that is charged for borrowing, which represents the annual cost of funds over the term of the loan.

Annual Percentage Yield (APY)

The amount of interest earned on a deposit account during a one-year period. This includes interest earned on the amount in the account and compounded interest for the year.

Automated Clearing House (ACH)

An electronic network in the United States that allows financial institutions to transfer funds. ACH is used for credit transfers like direct deposit, payroll for businesses and vendor payments. It makes transferring money simple and efficient, saving business owners and individuals time.

Cash Concentration

A consolidation of funds from multiple accounts into a single master account. This improves efficiency of cash management, especially for businesses with multiple locations or branches.

Certificate of Deposit (CD)

A bank-issued certificate for a deposit that earns interest at a certain rate for a specified amount of time. CDs are generally considered safe investments and usually have a higher interest rate than regular savings accounts.

Compound Interest

Interest paid on the principal account balance and on the interest it has already earned.

Credit Score

A number that indicates to the lender an individual’s ability to repay a loan. Credit scores can affect your credit approval for credit cards, loans and mortgages. They can also affect how much you pay in loan rates, approval for renting and insurance costs. The number is usually between 300 and 800. You can get a free copy of your credit report once a year at the following three agencies: Equifax, Experian or TransUnion. Go to AnnualCreditReport.com or call 1-877-322-8228.

Direct Payroll Deposit

A process that allows for the direct disbursal of net pay to employee accounts. This streamlines payroll for business owners and deposits paychecks into employees’ accounts on payday.

Direct Debit

A system that allows creditors to automatically withdraw payments from a customer’s bank account at regular intervals. This allows customers to automatically make regular payments such as rent, mortgage or other recurring bills.

Electronic Funds Transfer (EFT)

An electronic-based system that transfers funds between accounts. This includes Automated Clearing House (ACH) and wire transfers.

Federal Deposit Insurance Corporation (FDIC)

An independent government agency that insures deposits of all national and state banks that are members of the Federal Reserve. This promotes public confidence in the U.S. financial system because the agency insures banks’ deposits for up to $250,000 per depositor. The agency monitors and addresses risk of each member bank. For more information, visit www.fdic.gov.

Interest Rate

The percentage of interest paid to the account holder on an interest-bearing account or the percent charged on a loan to the borrower.

Individual Retirement Account (IRA)

An account that is tax-free or tax-deferred for individuals to save for retirement. There are multiple types of IRAs, including Traditional IRAs, Roth IRAs, SIMPLE IRAs and SEP IRAs.

  • Traditional and Roth IRAs- Established by taxpayers who are allowed to contribute all of their compensation up to a certain amount. Traditional IRAs may be tax deductible, depending on income, filing status and coverage. Roth IRAs are not tax deductible.
  • SEP and SIMPLE IRAs- Retirement plans established by employers.

Line of Credit

A loan arrangement between a bank and a customer allowing the customer to borrow funds up to a specified limit at any time during the life of the loan. The customer is not obligated to borrow at any particular time, and interest is not usually charged on the part of the line that is unused.

Maturity Date

The date the principal amount of a debt instrument is due and repaid to the investor. This is also the date interest payments stop.

Minimum Daily Balance

The minimum balance a bank requires an account to have each day to avoid maintenance fees.

Money Market Account

An interest-bearing account that generally has higher rates than savings accounts, but requires a high minimum balance and restricts the number of transactions that may take place in a month. These accounts are an attractive option because they generally offer a higher return.

Pre-Authorized Debits

An arrangement between a customer and a bank that authorizes the bank to withdraw from the customer’s account. These can be set up to conveniently make recurring payments or transfer funds.

Positive Pay

A service implemented to prevent check fraud by verifying that checks presented for payment match company-issued checks and alerts check issuers of all mismatches.

Remote Deposit

A service that allows customers to deposit checks at their convenience using a scanner or smartphone and software provided by the bank. This tool is especially useful for business owners, who can make deposits without having to make a trip to the bank.

Sweep Account

An account that automatically “sweeps” funds exceeding a predetermined balance into an investment account (usually with a higher interest rate), then automatically “sweeps” them back into checking when balances drop below a predetermined minimum. This provides account holders with the highest amount of interest without having to frequently move funds between accounts manually.

Standby Letter of Credit

A letter issued by a bank upon contract initialization on behalf of its client that guarantees payment to fulfill a contract, should the client fail to meet its contractual obligations with the third party.

Term Loans

A loan with a specified repayment schedule, usually between one and ten years, and typically with a fixed interest rate. Term loans are often used by small businesses to purchase fixed assets like equipment.

Wire Transfers

Wire transfers allow you to efficiently and securely transfer funds electronically from individuals or entities to other individuals or entities. They can be used to make payments or send money.

Zero Balance Account (ZBA)

A zero balance account receives only enough funds from the concentration account to cover checks presented each day in order to maintain a balance of zero. These accounts are used by businesses to eliminate excess balances and increase investment opportunities.

Don’t let banking terminology overwhelm you. Talk to a Revere Bank representative today to get answers to your questions. For more information, contact us online or contact a Revere Bank relationship manager by phone at 866-950-5784 or by email.

This publication does not constitute legal, accounting or other professional advice. Although it is intended to be accurate, neither the publisher nor any other party assumes liability for loss or damage due to reliance on this material. Websites not belonging to this organization are provided for information only. No endorsement is implied.

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