Merchant banks are different from retail and investment banks and target a customer base between the two. While retail banks cater to the needs of the general public and investment banks work with big sharks and the government sometimes, merchant banks facilitate medium to large-sized businesses. Now, if you wonder what a merchant bank is and what it does, here’s everything you need to know.
What are Merchant Banks?
Merchant banks are financial institutions that help big businesses with loans and funds along with giving financial advice. You may call them a combination of consultancy service and banking. They facilitate the growth of companies that do not receive loans or investments from other financial institutions. Merchant banks offer portfolio management, underwriting, loan syndication, and financial advice. Some such banks also provide financial assistance on an equity basis.
Merchant banking helps businesses in multiple ways:
- They help modernize the business.
- Merchant banks help boost businesses by raising funds.
- You may take merchant banking services to revive your dead business through their strategies.
- They facilitate buying and selling of stocks in the stock market.
Functions of Merchant Banking
Besides the few mentioned above, merchant banks perform numerous functions for their client organizations:
Portfolio Management
Merchant banks help their clients manage their portfolios and buy securities on their behalf. Merchant banks offer consultancy services and improve the value of underlying investments. They assist their clients in making deals and purchases and enable the sale of securities. By managing their portfolios, these banks facilitate businesses with making decisions for safe investment. Simply, they buy and sell shares alongside managing fund investment for companies. They also make fundraising possible for their clients.
Project Management
As merchant banks are counseling institutes besides offering financial assistance, they help their clients regarding different aspects of a project. From researching the project’s success possibility to assisting you in making a decision and managing the project, they are there throughout. Project counseling or management covers all aspects of the project, including idea generation, research, budgeting, designing plans for financing the project, and advising about possible increments and concessions.
If you ask your bank for further help, they also extend their expert advice on the location of the plant, feasibility reports, policy benefits, and sources of support. Having a merchant bank on board with you on a project means that you do not have to worry about anything and relax while taking care of investments and solutions to associated problems.
Credit Syndication
One of the major reasons businesses approach merchant banks is their credit syndication services. If you have not been able to get a loan from any of the big names that might help your business reach heights, a merchant bank can always help you.
Merchant bankers are qualified and experienced in the domain and know how to get money from a specific institution. They understand the matters in-depth, making it comparatively easy to get credit from another company or financial institution. They provide loan syndication services to their clients to smoothen and speed up project planning and loan applications to get short-term and long-term loans.
Merchant banks do so by estimating the costs and creating a professionally correct financial plan not to miss any important, relevant details. They also help select the right institution for you to request credit and comply with all the terms on the application with the investors.
Merchant banks provide multiple services collectively known as credit syndication. These include
- Estimating the overall cost of the project
- Designing a financial plan that covers all loans and investments you need while putting down all important information
- Suggesting ideal financial institutions for short-term and long-term loans
- Helping the clients with the loan application, complying with the financing company’s terms, and monitoring the progress
- Taking care of legal documentation formalities of the investing companies
Apart from all this, the counseling feature of merchant banking helps you estimate the capital requirements and help negotiate.
Facilitate Small Businesses
While merchant banks are primarily considered good friends of medium-sized to big companies, they also offer entrepreneurs and small companies services. They usually counsel small businesses about bigger opportunities, incentives, concessions, and government policies to boost their business. By taking advantage of these policies and incentives, they can grow and become an eminent name in the market.
Revive Dead Units
Experts at merchant banks are not only adept at helping businesses get loans from companies or project management, but they are also good at reviving and restructuring units or dead businesses. Merchant bankers connect with long-term financial institutions and assure them about the potential in your business. It requires proper documentation, negotiation, and taking care of the legal needs of the investor.
Stock Market Brokerage
Merchant banks are also an excellent choice for stock market brokerage to buy and sell stocks on your behalf. To make sure that they make the right choice for you, merchant banks carry surveys and suggest to you about which shares to purchase, for how long, and at what rate. Having a merchant banker to do all this for you lets you know that your money is in safe hands with experienced people. Merchant bankers also counsel their clients about when to buy the shares and sell them for the best profits.
Manage Public Issue
For companies that are not aware of the public issue of their business, merchant banks help them with the timing of the issue, form, and enable them to be specific to customers.
Merchant banks manage the public issue by:
- Advising the price and size of public issue
- Counseling at the time of filling up
- Acting as a manager in the whole process
- Listing the shares purchased
- Allotting securities and helping in accepting applications
- Helping with the appointment of brokers
The Bottom Line
If you are a medium-sized business, you can let go of all your funding and stock-exchange-related worries by connecting to a merchant bank. They are genies that help you with all issues, from counseling to getting loans and credit for your company. Merchant banks also buy and sell stocks on your behalf and manage portfolios and the public issue.
Matthew is a Co-Founder at BusinessFinanceArticles.org. Matthew was a floor manager at a local restaurant in Wales. He lost his job after the pandemic and took initiative to make a team and start the project.
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