Every one of us is familiar with traditional banking and all the services that banks offer to us, right? But what if you’re running a big business or are already a high-net-worth individual? What then? Like, how would you go about getting some important and basic financial or banking services? Well, that is precisely where the role of merchant banks comes into play, and providing these businesses or high-net worth individuals the services like fundraising, investment management, and advisory services is what we call merchant banking. So, if you’re intrigued enough to get to know more about it all, then just keep on reading because we’re here to discuss the merchant banking advantages and disadvantages. Here we go then.
Advantages of Merchant Banking
1. Getting Your Hands on Cash Easily
See, businesses are always looking forward to growing even more, and for that, they need access to more capital, and sure enough, this is precisely where the role of merchant banks comes into play. But the thing is, it isn’t always giving out loans or anything like that, nah, instead, these merchant banks find you the investors for whatever project you have in your mind, like setting up a new store, launching a new product, expanding to some other nation, or anything like that.
2. Expert Advice to Guide You
Oh, other than money, it is actually the advisory part that merchant banks are famous for or preferred for. It is not just basic or surface-level stuff, though, you see, merchant banks provide you with pro-level advice for big movies like merging with another company, buying one, and things like that. Most of the time, merchant banks have some really skilled and smart people working for them, so they make sure that your business makes profits while keeping the risk super low.
3. Custom-Made Money Plans
See, with normal banks, when you go ask for a loan, they have already pre-planned loan options, but that’s just not the case with merchant banks in general. Like, you can get specific loan offers, some highly customizable ones too. And that’s the best bit about it all. Well, believe it or not, there are so many companies or businesses that actually like this flexibility, and it can make a huge difference for them.
4. Opening Doors to the World
It is not just working in one place and that’s all, you see, oftentimes, merchant banks have connections on a global level. And how does that help? Well, if you are aiming for your business to go truly international, then sure enough, these connections can be a big thing, and that is precisely why merchant banks offer this service as well.
5. Super Simple Application Process
See, with merchant banking or banks in general, whatever service you require, you can get it in an instant, unlike the regular banks where you’d have to wait in line, fill out loads of paperwork, and stuff like that.
6. No Need for Collateral
With traditional banks, when you need a loan or money for whatever reason, you most of the time have to put up something as collateral, and that’s a big problem for many. But unlike that, in merchant banking, most of the time, you don’t need any collateral, and that’s because you become a merchant bank customer when they fully trust you or your business. So, it is a trust game from then on.
Disadvantages of Merchant Banking
1. It Can Cost a Lot
We bet many of you didn’t think of the cost factor up until we mentioned it here, right? Well, yes, when you’re thinking of getting the merchant banking services, you have to consider the cost, and spoiler alert, yes, it can cost a lot. Leaving the service cost part for now, you see, when we talk about the loans, you’d see yourself ending up paying more, for example, if you borrow just ₹2 lakhs, you might end up paying back ₹2.6 lakhs or even more, depending on the deal. That’s how it is, no matter if you like it or not.
2. Pay Back Fast, Like Really Fast
See, unlike the traditional banking services or loans, when you borrow money from merchant banks, the payback tenure is way shorter than you think. Like, in most cases, it is weekly or even daily. That’s just a borderline stressful thing, especially if your business is trying to scale things up. In that case, it’ll really be super hard for you to manage these payments, mainly when the income isn’t pretty steady.
3. Risk of Getting Stuck in a Debt Trap
Debt Trap? Yes, that’s even a possibility with merchant banking as well. How? This happens more often than you think, and the main reason behind that is the fast repayments and the higher costs associated with the loans. Plain and simple! And when you miss out on some payments, you decide to borrow more from elsewhere just to keep up, and from there on, the cycle just keeps on going.
4. No Reward for Paying Early
With regular banks, it happens that you get some savings on the overall interest if you pay the loan early. But that’s just not the case with merchant banking. This is not how things work here. You pay back the loan on time or early, it just doesn’t matter. You’ll be charged the same interest rate, and oftentimes it is just fixed for the tenure.
5. Not the Best for Every Problem
See, just to put it out there straight up, you shouldn’t be borrowing money from a merchant bank when your business already has ongoing money problems, the bigger ones. You won’t like the faster repayments and higher interest rates in that case, and as we already discussed, it can leave you in a debt trap. So, yes, it is not always the solution to every financial problem with your business.
Final Thoughts
That is pretty much it. As you saw, merchant banking can be useful for businesses and high-net-worth individuals, but that’s not always the case. There sure are benefits to this type of banking, but you can’t or shouldn’t just overlook the negative sides.
