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All bankers are intermediaries gathering funds in the community and lending them to entrepreneurs and others. Merchant banking does this with a difference. While the banks rely on depositors for funds, merchant bankers supplement their own money with funds gathered from wealthy individuals, commonly referred to as angel investors.
Essentially and historically a merchant banker was a principal in all of their transactions, a partner making money only when the other partners did. Put another way, a merchant banker placed his/her own personal money at risk and used the appropriate techniques to manage that risk and earn a return.
Merchant banking predates the modern banking structure and arose hundreds of years ago from the need to finance trade in goods, particularly on an international scale. A common form of merchant banking was to buy the promised payment for a good at a discount price. In the days of oceangoing trade, this meant that a merchant could get an advance on the money they were owed and avoid waiting a month or more for payment.
Like the venture capitalists of today, European and British merchant bankers financed many of the new technologies of their time. A good example is the great North American railways where, like the investment dealers, they raised funds by purchasing railway bonds and then reselling them to others. Among the most well known were the Rothchilds and Barings, with the latter financing the Canadian Pacific Railway.
During the late 1800s and early 1900s the modern banking structure emerged. Built on deposits and equity from shareholders it eclipsed merchant banking's role as a mainstay of financing. Soon after, investment dealers and later venture capitalists took over as financiers. Consequently, few if any North Americans have dealt with merchant banks.
MOLSON: A CANADIAN FINANCING TRADITION SINCE 1785
In January 1785, John Molson, then just turned twenty-one, bought the assets of a bankrupt brewery. To finance his purchase he had to borrow against his inheritance-property in England. However there were no banks in Montreal or Quebec City that would lend him the money. In fact, there were no banks.
Molson had to issue a promissory note against his inheritance. The Canadian financier buying the note would have had to get it to England and present it to Molson's bank where his attorney would subsequently arrange for a bank loan in England against Molson's property.
The value of the promissory note exceeded the funds that Molson requested. This was to compensate for the time delay of several months and the risks involved, which included the likelihood that the sailing ship carrying the note to England would be plundered. There was also the possibility that the bank would refuse to accept the note arranging the required loan. However, despite the initial risk-related cost of arranging for the loan, it permitted Molson to acquire the basis upon which he built his business empire.
It did not take John Molson very long-seven years (1802), to become a financier in this business of profiting from the purchase of invoices, or "bills of exchange" as they were then called.
Technological changes such as the replacement of sail with steam engine powered ships merely enhanced this business. The steamship transformed rivers into transport highways, reducing the time to go upstream from Quebec City to Montreal by days.
Drawing on his background in the business, Molson was the financier and then entrepreneur who introduced steam powered ships on the St. Lawrence in 1809. In doing so Molson's shipping line became a key link in a revolutionary transportation corridor stretching from New York, upstream on the Hudson to Albany then by stage to the south end of Lake Champlain into the Richelieu River to St. John, then forty miles by stage to Montreal. It was of course no surprise that as steam engine technology evolved, Molson was also involved in the building of Canada's first railway between St. John and Montreal.
Molson and his sons found that their shipping activities gave them privileged access to information on the supply of bills of exchange and by 1815 they were heavily involved in this type of financing activity.
But things change and the Molsons' speculation in bills of exchange (invoice purchasing) from the decks of steamships soon gave way to participation in the newly developing chartered financial institutions. In 1822, the Molsons became major shareholders in the Bank of Montreal and John Molson sat as its President until 1830. In 1853 two of his sons founded Molson's Bank, which operated until 1925 when it became part of the Bank of Montreal.
John Molson's initial success in obtaining the money he needed to build his empire is a clear example of the kind of growth that can occur when it is possible to access the money needed to take advantage of business opportunities when they arise.
As a footnote, the source of our material is Douglas Hunter's, MOLSON The Birth of a Business Empire.
BANK OF NEW YORK: 1784
Alexander Hamilton's aspirations as reported in The Bankers: The Next Generation by Martin Mayer
[A] Storekeeper in Albany could order $1,000 worth of imported china dishes from a merchant in New York on April 15; the storekeeper would enclose with his order a written promise to pay the merchant the full $1,000 upon the safe delivery of the dishes on May 15. Without the facilities of a commercial bank, the merchant would have to tie up his capital for the thirty days until May 15, before presenting the storekeeper's note for collection. With the Bank of New York in business, the merchant could ask its cashier, M. Seton, to "discount" the storekeeper's note the moment it arrived on April 15; if Seton knew the storekeeper to be a man of probity and substance then he would accept his promise to pay $1,000 one month hence on May 15, while presenting the merchant with a sum of $995 in cash now, on April 15 . . . [This money] could now be used . . . to place an order for another bulk shipment of china dishes from Paris or London.
A good way to describe merchant banking as practiced by John Molson and The Bank of New York is the provision of funds for entrepreneurs from entrepreneurs. Acorn Partners is proud to carry on this centuries-old tradition of merchant banking. As a merchant banker, Acorn Partners is the leading supplier of Sales Driven Financing© to emerging companies, including technology firms.
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