What Is a Merchant Bank?

admin August 21, 2023
Updated 2023/08/21 at 10:47 AM
What Is a Merchant Bank?

Merchant banks are non-depository institutions that provide services including lending, private equity, and financial advisory. Their specialty is providing much-needed capital to mid-sized companies across various industries. They’re also a source of funding for acquisitions.

The merchant banking services are tailored to the individual client’s needs and will vary based on the size of the business and their financial goals.

They can engage in general investment banking activities, such as advising on mergers and acquisitions (M&A) or helping a company raise funds by issuing debt or equity. 

Merchant banks provide lending, financial advisory, and investing services for private companies and wealthy individuals. They differ from commercial banks because they do not accept deposits from the general public.

Let’s find out how merchant banks work, and how they meet customers’ needs.

Merchant Banks Definition and Examples

A merchant bank is a financial institution that provides capital to companies in the form of share ownership instead of loans. The bank may also assist the company with handling mergers and acquisitions or managing assets. This type of bank is different from a traditional commercial bank in that it does not work with individual customers on personal banking or related needs.

As you can see from the different examples, merchant banks play a very important role in helping companies find the financing they need to raise enough capital to move forward with a new manufacturing project or to expand operations into new markets. 

So, If you are looking for ways to take your own company onto the next stage of growth, it is important that you consider working with a merchant bank as part of these efforts.

Merchant banks typically deal in international finance, corporate lending and investment for customers. Where commercial banks are focused on providing loans and savings accounts, merchant banks work to raise funds from investors and provide loans to customers.

In the world of banking, a merchant bank often includes increasing the amount of capital available to it by working directly with the company’s management team. 

Sometimes, focusing on a specific industry, merchant banks are an excellent resource for investors and customers who need additional capital to expand their operations. This form of funding is specifically helpful for companies that have expanded as far as they feel possible with internal capital alone.

As a result of the dual role they play as investors and advisors, merchant banks can be helpful in promoting various steps for vital companies’ financial transactions. 

For instance, when a company is considering purchasing another, it can leverage merchant banks to understand how feasible the move is and also see the financial implication of such a decision. It also help to consider the financing options available and provide the financing transaction, to make the buying process a reality.

How Does a Merchant Bank Work?

Merchant banks work by providing lending, investment, and financial advisory services to wealthy individuals and private companies. They are non-depository institutions that do not offer services to the general public. 

Merchant banking services are offered by a wide range of companies that may or may not officially identify themselves as merchant banks.

They specialize in lending and offering financial advisory services to private companies and wealthy individuals. 

They operate at the international level, often helping entrepreneurs invest in new businesses or create public trading markets for their private companies.

A merchant bank provides credit and advice to businesses in order to make a profit. It is different from a traditional retail or commercial bank because it doesn’t take deposits from general members of the public. 

Typically, merchant banks provide services that other banks don’t. They were traditionally responsible for raising money for governments and assisting with international trade. Today, merchant banks are most commonly known for providing investment banking services to companies and providing loans to private individuals of high net worth (people with significant amounts of money).

Merchant banking is an old term that describes banks and banking houses that primarily provide financial services to wealthy individuals, companies and other banks. In this form of business, investment banking takes precedence over commercial lending activities.

Merchant Bank vs. Investment Bank

While merchant banks and investment banks can seem very similar at first because both types of financial institutions help their customers with raising funds, making investment decisions, and general financial advice. Merchant banks typically work with smaller private companies or wealthy individuals, while investment banks often work with larger public companies and wealthy individuals.

Another key difference is that merchant banks help with private equity investments, while investment banks assist as an intermediary with finding suitable investors for a public offering (IPO).

Both types of financial institutions help their customers with raising funds, making investment decisions, and general financial advice. Neither institution will take customers’ deposits as non-depository financial institutions.

Although both of them deal with investments, a merchant bank and investment bank are different, and it’s easy to confuse the two.  A merchant bank provides smaller private companies, wealthy individuals, or entrepreneurs with financial advice, loans, or capital to grow a business. 

Merchant banks are more interested in private equity investment and IPOs, and don’t offer to provide as many services to their clients. Because of their focus on private equity investment and finding suitable investors or assisting in IPOs and private placement for their clientele, merchant banks give their clients advice and perspective for deciding on investments. 

An investment bank provides larger public companies and wealthy individuals with financial advice, loans, or capital. Investment banks focus on assisting in IPOs by finding suitable investors and helping public companies find new equity investors. 

Investment banks offer their expertise to help clients with investment decisions and general financial advice.

A primary difference between the two is that merchant banks service smaller private companies and wealthy individuals while investment banks service larger public companies and wealthy individuals. 

Merchant banks deal with private companies while investment banks work with public companies, but they both offer financial advice and help with raising capital. 


Merchant banking is a broad term that includes the investment and financing activities of merchant banking firms. They are often the first place a business owner turns when beginning a new venture or seeking to merge with another company.

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