Merchant Banks versus Investment Banks

What is the difference between merchant banks and investment banks? To the average consumer, all banks are more-or-less the same. We use them to keep our savings and receive our salaries. Sometimes, they give is credit cards, check books, or loans. If you don’t pay your debts, the bank might repossess your stuff. There are different kinds of banks, such as investment banks and merchant banks.

The basics of investment banking

If you know anything about stocks, shares, and bonds, then you know you need a bank to buy or sell them. These transactions aren’t done at ordinary banks. You can only trade your debt products through an investment bank. Investment banks deal in equities and debt. That means they hold your stocks or shares, so if you want to make a withdrawal of those assets, then you have to instruct them to cash in your stocks, shares, or bonds. That means they sell your equities and give you the money.

The basics of merchant banking

In the UK, merchant banks are the same as investment banks, but in the US, they are slightly different. A merchant bank provides capital for corporate and commercial ventures. This means the merchant bank can invest venture capital into your business, offering both cash and advisory functions. The bank will back your project or brand, and might take a seat in your company board. They have a direct stake in your company and own an agreed number of your shares. Instead of giving you a loan, the bank will give you funding in exchange for shareholding. They actively own a part of your company.

Telling the difference

Both merchant banks and investment banks are proxy banks. They don’t generally take deposits or issue withdrawals. While investment banks hold your share / stock /t-bill portfolio, merchant banks have shares in your company. The documents that your investment bank keep belong to you. The documents that your merchant bank hold used to be yours, but now they belong to the bank. The bank ‘bought’ your shares in exchange for funding your project.

Your investment bank works on your behalf, trading your assets and advising you when you need it. They take a commission and a service fee on any cash they earn for you. Your merchant bank is more like your business partner. They are involved in your business decisions and receive part of your profits. Merchant banks are peers rather than employees.

Credit cards from proxy banks

A merchant bank can offer you access to money as part of its investment in your business. That means they can issue corporate credit cards to your business. Investment banks can’t issue credit cards because they don’t deal with you on a cash basis. They can only offer proof of your portfolio as collateral for a loan from another bank.

For more information on the difference between merchant banks and investment banks, or to sign up for a merchant account, please call (888) 924-2743 or go to Charge.com.