If you’re Apple or the Federal Government, you do not have to worry about banks getting loans. There is a line around the corner of banks begging to lend you money and even $18 trillion in debt, literally, will not get you turned down. However for the thousands of small and medium sized business around the world, securing loans can be more challenging.
This is where the Merchant Banking Industry comes in. Merchant banks specialize in offering financial products unique from investment banks and cater to small to medium established businesses. While a large investment bank might manage the I.P.O (Initial Public Offering) of a new multi-million valued tech startup, a merchant bank might offer smaller bridge loans or purchase equity with a company based on a proven financial track record. For a medium sized business that is too small to be offered more generous financing opportunities and is already established, thus not generating interest in initial investment, merchant banking loans are a crucial means of security.
A typical merchant bank will look at how long a business has been in operation and monthly revenue streams to offer loans from $250,000- $3,000,000. This kind of financial product fills a gap for the many medium sized businesses that aren’t offered the opportunities of investment that a tech startup or large corporation would get but need something more than would be offered to a smaller business. It’s not Facebook money, but it’s not a payday loan either. Merchant bank loans are a safe midrange product that don’t have a high bar for approval. Merchant banks also provide two other critical services unique from traditional investment banks, underwriting and securing foreign investment. It comes with the territory of the banking industry that the process of providing these services can be, to understate it as much as possible, complex. However, for underwriting, many merchant banks choose to purchase equity or seek another interested party. For foreign investment, merchant banks typically use they’re established connection to offer a business investment opportunities that they would not otherwise get.
Banking and the financial industry, in general, can be difficult to fully understand, and those within the industry haven’t exactly made they’re business practices open to the general public, however, to understand merchant bank loans, a sports analogy will make it clear. Think of LeBron James and his sponsors. Nike already has his next 4 $100 million checks cut, he doesn’t even need to think about sponsorship if he doesn’t want to. The U.S federal government and Boeings of the world are LeBron James. Practically nothing will stop banks from offering them enormous amounts of money. On the other end of the spectrum, you have Jesse Crane, don’t recognize the name? He’s a relief pitcher for the Charlotte Knights, a AAA minor league baseball team. His sponsors are Jack in the Box franchise owners who require him to come to every opening to get paid, if he’s lucky. Is sponsorships opportunities are far and few between and he has to earn them. Jesse Crane is the newer small business, not enough name recognition, reach, or potential reward, unless he gets drafted, not a good investment and certainly not worthy of generous terms. Right in the middle, we have Branden Albert, a tight end for the Miami Dolphins. A name unrecognized by most, but playing for one of the most popular teams in the country. He is not a super star, but he plays football for the Miami Dolphins. Nike isn’t beating down his door, but he doesn’t have to beg for autograph signings at a Publix opening either. There exists a number of midrange sponsors who recognize his proven track record, potential for growth, and opportunity to get a good deal. These are merchant banks to mid-range businesses. They cater to those underserved by other financial institutions, they offer financial products to those who have been passed over, medium sized loans with more lenient requirements that many more business can get, in other words, more profit.