Wishful thinking...

So I promised a new piece, but in the mean time life had caught up with me and my noble desires did not materialize; for that I apologize. However, I never default on my word...

Operating an international trading house in Canada, especially in Quebec, is not an easy thing to do. SMEs that provide export and import services to local manufacturers and distributors are very important agents of development, fighting Quebec's dependence on exports to the US, especially in times of crisis, like we have seen recently, and providing competitive sources of supply for local manufacturers and distributors. First of all, export service companies or trading houses, have been agents of economic development since the beginning of modern economy: the first chartered company ever to issue shares traded on a stock market was the Vereenigde Oost-Indische Compagnie (VOC) (literally "United East Indian Company") in 1606. This was a major trading company for Asian spice and its stock was traded on the Amsterdam Stock Exchange. It had the approval of the King and a monopoly to carry out its activities. This has allowed it to become one of the (at that time) world's richest companies and to spread the Dutch influence to the farthest reaches of the world. This legacy remains in the policies of the European governments toward international trading companies and the type of terms banks give to these companies, however we are quite far from that legacy, here in Canada, despite the fact that we are a nation built on trade!

I am not a banker, so I do not claim to have a perfect vocabulary with regards to the banks services and procedures. This however, is the case for most SME's, so at least I will try to paint the picture from their point of view. From what I understand, banks in Canada have two main types of financing models: asset based or equity based financing. This means that a service SME can't really use the first one (because it has not assets) and the second one is really dependent on its receivables. If things are properly done, the accounts receivable are already secured by credit insurance or by the way that ownership to the merchandise or service is passed (documents only sent if the payment is received, otherwise there is a retrade). So even if the receivables themselves are secured, and the accumulated equity of the company (we must specify "accumulated" because otherwise a banker will say that the equity is the receivables minus the payables). In fact it is receivable minus payables, but add the retained earnings and capital, then you have the real equity on the basis of which the bank finances. So, when you look at this equity, the banks in Canada only finance one-to-one or maximum two-to-one (1$ of loan for 1$ of equity). However, the European banks finance three or four-to-one, because they know that those receivables are already secured (see previous post for explanation), thus giving their European customers much greater power of trade. Moreover, us, Canadians, we are on the safe side, always. This the credit insurance we have from EDC is more conservative and solid, but also costs a lot more money, no mater who you are. In Europe, Coface routinely insures the customers of equivalent companies for a fraction of the cost.


When you add to the previous point the historical perspective that Canadian exporters are lazy because they have as their neighbor the biggest consumer in the world and therefore they don't have to force themselves to export to more challenging (but possibly rewarding) destinations, you have a recipe for international trade paraplegia. The lonely crusaders in this are the Canadian trading houses, especially the smaller ones. Of course, we are big grain and lumber exporters, and the Canadian Wheat Board could be considered as a very important and successful trader, but they, just like the United East Indian Company, have a monopoly. This is a privilege reserved to the rich and the shameless, but the Quebec economy runs on SMEs so we have to find more human-sized solutions for them. This is where the trade houses could help local manufacturers take their products farther into the world, help them get into deeper trading territory,because they would have the knowledge, the finance and the logistics to do so. This is indeed some wishful thinking...