Magazine article Journal of Commercial Lending

Boosting Business Opportunities with Canadian Companies

Magazine article Journal of Commercial Lending

Boosting Business Opportunities with Canadian Companies

Article excerpt

The U.S.-Canada Free Trade Agreement (FTA) is creating increased opportunities for U.S. banks to lend to Canadian companies. The best opportunities are for banks that have a natural franchise with a Canadian company, such as a strong relationship with the U.S. parent of a Canadian subsidiary, or a market niche. Banks that have geographic proximity to export markets targeted by Canadian companies or that have specific industry expertise applicable to Canadian companies are also well positioned for new business.

While lending activity by banks located outside Canada is generally permissible in Canada, potential lenders should be aware of certain tax and regulatory issues that apply to their activities.

U.S.-Canada Free Trade Agreement

The FTA, enacted in 1989, sought to enhance an already good trade relationship by eliminating barriers to trade in goods and services, improving conditions for fair competition, liberalizing conditions for cross-border investment, and establishing effective procedures for resolving trade disputes.

As a result, the U.S. and Canada share the world's largest bilateral trade relationship, with an annual trade volume of $ 176 billion in 1991. The FTA is comprehensive, covering a wide range of issues, including technical standards; trade in agriculture, energy, wine and spirits, automotive products; services (including financial services); government procurement policies; investments; and visas for business purposes. The most important element, however, is that both countries agreed to eliminate all bilateral tariffs, beginning January 1, 1989. Some were eliminated immediately, and the remainder will be eliminated in 5 or 10 equal annual steps. The FTA also provides for eliminating nontariff barriers.

The results of the agreement, now in its fourth year, are expanded cross-border trade and investment. Canadian companies have increased exports to the U.S. from $71 billion in 1987 to $91 billion in 1991; direct investment by Canadian companies in the U.S. increased from $37 billion in 1987 to $45 billion in 1991. Exports from U.S. companies to Canada increased 42%, during the same period, from $60 billion to $85 billion, and foreign direct investment in Canada increased from $61 billion to $68 billion. The increased cross-border trade and investment leads to greater opportunities for U.S. banks to lend to Canadian companies.

Opportunities and Issues for U.S. Banks

Canadian companies that have established manufacturing or sales organizations in the U. S . to take advantage of free trade and improved access to the large U.S. market can be very good prospects for U.S. banks. Canadian companies that have established their subsidiaries within a bank's geographic market area are especially attractive prospects. These subsidiaries generally need U.S. dollar ($) operating services and U.S.$ working capital finance. Although the parent company probably has relationships with one or more Canadian banks, they will not be as competitive in providing U.S.-based operating services. The U.S. subsidiary will need to establish a relationship with a local bank.

U.S. banks that establish business or lending relationships with American subsidiaries of Canadian companies are subject to the same regulations and competitive environment that govern all their U.S.-based activities. However, depending on the level of management centralization in the Canadian company, decisions regarding banking relationships may be made at the head office in Canada. This would necessitate marketing efforts and due diligence calls to be made in Canada.

Canadian Banking

U.S. banks targeting Canadian-based companies for new business face a different competitive and regulatory environment. The banking industry in Canada is dominated by six large Canadian (Schedule I) banks and approximately 57 foreign bank subsidiaries (Schedule II banks), as well as a number of "near banks," such as trust and loan companies and credit unions. …

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