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What is a 'Merchant Bank'

A merchant bank is a company that deals mostly in international finance, business loans for companies and underwriting. These banks are experts in international trade, which makes them specialists in dealing with multinational corporations. A merchant bank may perform some of the same services as an investment bank, but it does not provide regular banking services to the general public.

BREAKING DOWN 'Merchant Bank'

One role of a merchant bank is to provide financing to large corporations that do business overseas. Assume, for example, that XYZ Company is based in the United States and decides to purchase a supplier that is based in Germany.

How Merchant Banks Facilitate Trade

A merchant bank can provide the funds to make the purchase using a letter of credit (LOC). The sellers in Germany receive an LOC issued by the merchant bank as payment for the purchase. Merchant banks can also help the purchaser work through the legal and regulatory issues required to do business in Germany.

If a multinational corporation operates in many different countries, a merchant bank can finance business operations in all of those countries and manage the currency exchanges as funds are transferred.

The Differences Between Investment Banks and Merchant Banks

A merchant bank typically works with companies that may not be large enough to raise funds from the public through an initial public offering (IPO), and these banks use more creative forms of financing. Merchant banks help corporations issue securities through private placement, which require less regulatory disclosure and are sold to sophisticated investors.

Investment banks, on the other hand, underwrite and sell securities to the general public through IPOs. The bank’s clients are large corporations that are willing to invest the time and expense necessary to register securities for sale to the public. Investment banks also provide advice to companies regarding potential mergers and acquisitions, and provide investment research to clients. Both investment banks and merchant banks strive to build relationships with corporations so that the institution can provide a variety of services.

Regardless of how a company sells securities, there are some minimum disclosure requirements to inform investors. Both IPOs and private placements require a company audit by an outside CPA firm, which provides an opinion on the financial statements. The audited financial statements must include several years of historic financial data, along with footnote disclosures. All of this information is provided to inform the potential investor about the risks and potential rewards of buying the securities.

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