What Is Merchant Banking? An Easy Guide for Businesses 

What Is Merchant Banking? An Easy Guide for Businesses 

Merchant banking is the small business owner’s answer to the investment banks used by large corporations. We’ll break down the differences between merchant banks and investment banks in a moment. But, before we do, you need to know that merchant banks are a rapidly growing financial service for small businesses.

The market size of the merchant banking industry in the U.S. has grown by a 5.1% annual average between 2017 and 2022. Compare that to its 12.6% growth rate in 2022 alone and it’s easy to see the sector’s upward trajectory. 

Merchant Banking_Industry Growth Rate_Infographic

Merchant banking may be right for you if you’re a high-net-worth individual or if your SMB does a lot of high-volume business internationally. In this article, we’ll take a look into the functions, terms, and characteristics of merchant banks. We’ll also go over some of the most well-known merchant banks and FAQs. 

Let’s get started.

What Is a Merchant Bank?

A merchant bank is a financial institution or firm that invests equity capital into small businesses. Merchant banks fill a few different roles, including fundraising, financing, underwriting, portfolio management, and loan syndication. Merchant banks also provide SMBs with advisory services and issue management. They’re kind of a one-stop shop for fundraising and advisory services for mid-sized businesses with international monetary affairs.

Although merchant banks relate to SMBs, they primarily deal with international businesses. Merchant banks work with private placements, not banks geared towards the general public. So, merchant banking also does not extend to companies big enough to have IPOs (Initial Public Offerings). Once a company gets big enough for an IPO, they’d work with an investment bank instead.

What Are Merchant Banking Services?

Merchant banking is a financial service for businesses that focuses on international financing, issue management, underwriting, and business loans. Merchant bankers focus on private equity investments. Think of them as the middleman between mid-sized companies or very wealthy entrepreneurs and potential investors.

Characteristics of Merchant Banks

Merchant banks aren’t commercial banks. In fact, they provide no traditional banking services. Instead, they work the B2B angle, helping merchants with equity financing, trade finance, and investment decision-making. Merchant banks help prepare mid-sized businesses and startups for larger capital markets. In essence, they invest in retailers with a business plan they believe in and help those companies scale.

Merchant Banking_Services_Infographic

What Are the Functions of Merchant Banking?

Merchant banking falls into its own unique category of financial services. Here are some of the core functions of merchant banks for quick reference:

  • Merchant banks provide equity underwriting to help companies that need more capital before they hit the stock market.
  • They often provide portfolio management and restructuring for businesses by buying and selling properties to enhance value.
  • Merchant banks help borrowers find the right major financial institutional investors to finance their vision. Many even handle the legal negotiations necessary to move a business plan forward.
  • Merchant banks derive their revenue from fees and commissions, rather than an outright payment structure. They often retain shares of the businesses they assist, bridging the gap between venture capital and IPOs.

Merchant Banks vs Investment Banks: What’s the Difference?

Neither merchant banks nor investment banks handle traditional financial transactions. While these forms of banking share some similarities, there are a few core differences. The most notable is scale. Merchant banks work with companies before they create an IPO, while investment banks work with them after they go public.

Merchant banks. Besides scale, merchant banks differ from investment banks in that they don’t provide mergers and acquisitions. Investment banks do. Merchant banks issue letters of credit and they provide clients with business, financial, and technological consultancy. They also help companies with security issuance. Their main focus is high net worth individuals and international businesses.

Investment banks. Most investment banks service large companies and IPOs. They facilitate purchases of mutual funds and hedge funds. Investment banks also help companies with mergers and acquisitions, whereas merchant banks do not. Investment banks also underwrite IPOs, whereas merchant banks come in before the company scales.

Some Examples of Merchant Banks

The growth of foreign investments, international business growth, and corporate financing is driving expansion in the merchant banking sector. Since merchant banks operate internationally, you’ll want to review the top companies in the United Kingdom as well as the U.S.

With that said, Citi, J.P. Morgan, and Goldman Sachs are the largest multinational merchant banks available to U.S.-based businesses.

The Bottom Line

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Every single dollar you save will help prepare your business to go international and acquire a merchant bank. For most small businesses, managing payment processing fees is half the battle to achieving long-term growth. 

Finding a merchant bank may not be easy but it’s certainly possible to save an average of $400 a month on payment processing with Payment Depot. See for yourself why we have an A+ BBB rating by connecting with our award-winning customer service team today!


For many retailers, merchant banks will be an entirely new concept. Although they can cater to SMBs, keep in mind that merchant banks only deal with high-profit businesses. Look at acquiring a merchant bank as one of the steps along your path to scaling your business internationally. With that said, here’s a quick list of FAQs about merchant banks for your reference.

What is a merchant banker?

A merchant banker isn’t your ordinary financial clerk. They’re essentially high-level financial advisors, focused on security management and placement that can provide international financial advisement services. Merchant bankers also manage securities.

Why do you need a merchant account?

A merchant account isn’t the same thing as a merchant bank account. A merchant account is a basic business bank account that you use to process credit card transactions. A merchant banking account is for international business.

How can you get a merchant banking account?

A merchant banking account is essentially a high-level financial institution investing in your business for equity. To get a merchant banking account, you need to apply and have a business plan that they believe in. Think of it like a formal episode of Shark Tank where the judges are your potential financial institution.

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