What is Merchant Bank?
A merchant bank can be classified as the type of financial intermediary or bank which deals and handles investments and commercial loans for small and medium-sized business. Their existence date back to the medieval period when there had been active trading of commodities.
Explanation
In modern-day scenarios, they are often regarded as investment banks. This bank can be classified as the bank or a company that performs underwriting, as well as provides services on loans, conducts consultations on critical financial projects and investment matters for small-sized business. It additionally helps in fundraising activity for institutional investors and large corporations. They generally don’t offer traditional banking services such as that of deposits acceptance and lending them to smaller group of borrowers.
Objectives of Merchant Bank
The broad objectives of this bank are offer to credit services and perform underwriting for its institutional clients and corporate clients. Additionally, their main objective is to help business in capital formation by providing services of standby credit, underwriting of securities that are generally backed by the guarantees.
They additionally have an objective of creation of secondary markets wherein the bills are exchanged or traded and wherein the merchant banks play the role of central accepting house. They additionally provide dealer services in terms of buy and sell transactions of financial instruments.
Examples of Merchant Bank
The world-renowned underwriters are normally composed of Macquarie, JP Morgan, Citigroup and Goldman Sachs. Small companies who wish to acquire finance either through debt or equity can get in touch with any one of the merchant bankers. This bankers may then set-up series of meetings to gather the requirements of the companies.
Once they gather the desired information, they undertake counselling and advisory sessions for the small client. They tell them about the pros and cons of the available methods of finance. They additionally make the business understand the cost structure with respect to the available modes of finance.
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Services of Merchant Bank
The merchant banks offer their services to medium-scale as well as small scale enterprises who are unable to raise funds from the initial public offering. They provide their services in the form of bridge financing, mezzanine financing etc. They also help in private placements for corporations who look out for minimum disclosures on regulations and compliances.
They additionally provide advisory and corporate counselling. For project-based financing, they provide prompt project counselling which broadly covers the format of report towards the preparation of projects and how they acquire finance for the project.
Functions of Merchant Bank
The broad function of the merchant bank is to offer portfolio management services to the corporate clients, medium scale business and institutional investors. To enhance the value of underlying instruments, they provide services towards management of financial assets. They facilitate buy and sell transactions of the financial claims to help their clients achieve their investment objectives.
They additionally help in the underwriting for a large business who wish to acquire capital from the stock markets. They help in preparation and filing of technical documentations and prospectus on the behalf of the business. They collaborate with the marketing department of the business so that they could market the stock offering of the business.
The bankers additionally help in acquisition of loans from the banks and financial institutions. They formulate financial plan and budget on the behalf of the business and determine the total costs involved toward the acquisition of loans that are of bigger ticket size. They liaison with the lenders to acquire bridge finance for the business with the intent of meeting up towards the working capital requirements.
Importance of Merchant Bank
The bankers help the small size and medium-size business to acquire finance for their business who are not big enough to raise finance from the venture capitalists and investment bankers. They additionally play a critical role for these companies who cannot afford high floatation costs of the capital markets and bigger investment banks.
The merchant bankers are always required for corporate counselling as well as for project counselling. They act as a bridge or an intermediary between the savers who wish to have high returns on their invested sums and users of the funds who want to use the funds for better utility purpose.
Merchant Bank vs Investment Bank
There is fundamentally little difference between an investment bank and a merchant bank. The merchant bank deals with medium-size business to small size business whereas the investment banks deals with the large size companies. The bankers offer innovative lending solutions for the small size business as well as help them with equity and bridge financing as well as with mezzanine financing.
The investment bankers on the other hand help business of large size to acquire finance and capital from the capital markets through the means of initial public offering. They additionally provide big companies and clients with strategic advice on mergers and acquisitions with potential companies. They help in the capital restructuring of a large business.
The merchant bankers on the other hand focuses on corporate investing, investments on real estate and activities of trade finance specifically for medium to small size business. The investment banks help companies issue debt securities with the guarantees in the debt market and help them in raising additional funds. At times investment banks play the role of the depository as well which is normally not played by the investment bankers.
Advantages and Disadvantages
Below are the advantages and disadvantages:
Advantages
Below are the advantages listed:
- They provide regular counselling on projects as well as investments on small clients.
- They help small business raise finance easily.
- They play a critical role in reviving the weak and sick business.
- They help business in the distribution of profits to the residual investors.
- They help in cash management and leasing operations as well.
Disadvantages
Below are the disadvantages listed:
- At times, merchant bankers charge hefty fee and commissions for helping small business raise finance and this makes it an expensive affair for the business itself.
- The business itself delay in shares allotment process and hence makes it difficult for the bankers to sell such stocks.
- Due to compliance and restrictions imposed by the regulatory authority, the merchant bankers may have to limit their scope of business.
- They may have to separate their business activities and ensure that the activities do not break laws wherein they may have to float a new subsidiary.
Conclusion
The merchant bankers are individuals or entity who help in channelling of funds from the market participants who have surplus funds to individuals who need finance for their business. They help small business to raise finance either through bridge financing or mezzanine financing.
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