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Merchant Bank Account - What Is a Merchant Bank Account?

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When people think of banking, they generally think of a financial institution in which any person can visit a branch to open a checking account, savings account, and so forth. However, there are also merchant banks.

Merchant banks are different from retail banks. A retail bank is what people would generally imagine as a regular bank that offers banking services to walk-in customers who wish to open a checking or savings account. Merchant banks, on the other hand, usually only deal with businesses. An individual may be able to obtain a merchant bank account. However, a merchant bank is unlikely to do business with an individual unless he or she is exorbitantly wealthy.

While merchant banks are indeed a completely different kind of financial institution from retail banks, many decent sized banks have divisions for both retail banking and merchant banking. These two are almost always completely separated however. A business owner, for example, would never enter a regular retail bank branch in order to discuss going public with his company. Instead, these deals are usually worked out in separate locations owned by the bank or the business and do not receive much attention from the general public.

The services a merchant bank can provide to its customers are numerous and varied. Many of these services come out of merchant banks’ experiences working with very large multi-national corporations.

For example, one of the most common services a merchant bank provides is underwriting stock. Stock underwriting is a service that is needed by any large business that aims to profit by selling stock in its company. During this process, the merchant bank will determine exactly how many shares of stock should be sold, what the initial price per share of stock should be, and when the stock should be released onto the market. The merchant bank will also handle all of the very complex paperwork that will need to be filled out with certain federal authorities in order for the company to go public. The merchant bank will also typically help market the release of the stock to the public.

Sometimes a stock offering may be too large for only one bank to handle on its own. If this is the case, a number of different merchant banks may collaborate together to complete the process with one merchant bank taking the lead. Lastly, the bank will facilitate the sale of the stock to other entities. If all goes right, the company will make a hefty profit.

A merchant bank may also offer services most people more closely associate with banking. One example of that is providing loans to businesses. Merchant banks also provide a specialized kind of loan called a syndicated loan.

A syndicated loan involves more than one financial institution taking on the risk of the loan. First, the merchant bank will meticulously analyze all of the business’s cash flow. After this analysis, it will formulate what it believes would be the best terms and conditions for the loan. The merchant bank will then produce a memo that will be sent out to all the other financial institutions that will take part in the formation of the syndicate. The members of the syndicate will then negotiate before a final agreement for the loan is reached.

Due to merchant banks’ expertise in dealing with large corporations, they also offer other services to businesses that people do not usually associate with banking. For one, many companies use merchant banks as a source of consulting on business related matters. Advice sought could, for example, be on how a business should structure its capital or what would be that business’s best equity to debt ratio. A merchant bank may consult a business on how to best refinance. It may also help formulate a plan for a business in the red on how to best turn that business around and make a profit again.

Many large businesses even go to merchant banks for consulting on launching new business projects. This consulting can start with the initial concept. The merchant bank will continue the consultation through the development stage including helping perform studies to discover whether or not the project is feasible and how it could be altered to produce a better end product. The merchant bank will also help produce any documents needed for this process including any reports on the project.

In general, a merchant bank’s best asset may be its very specialized knowledge on how to best run a multi-national corporation.

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