Doing business in emerging markets requires a basic understanding of the countries your clients are based in.
Latin America is very diverse and offers business opportunities and challenges, which differ per country. Uruguay is different from Mexico, Chile is an open economy and Argentina and Brazil have foreign currency exchange restrictions, for example.
If you wish to avoid uncollectible receivables in Latin America, here are five topics you should focus your attention on.
Your “know your client policy” for Latin America
First of all, know the people and the companies you are doing business with. Where are your clients based? What is their business track record? Can you get referrals on them? What is their financial status and their commercial reputation, locally and internationally?
Legal context: contracts and other documents
The next step is to understand the legal context. How do contracts and other documents, like order forms, certificates and licenses work? Which are the requirements to make sure that these documents, which may be entered into between companies from different countries, have legal value in the country your client is based in? The assessment hereof may vary substantially per country in Latin America.
Invoicing requirements in Latin American countries
When you start to do business, and invoices need to be issued, it is of the utmost importance for you to understand the invoicing process as applicable in Latin American countries. There may be specific local requirements to make invoices legally valid. Also, your client in Latin America may, for tax reasons, may require specific formats for invoicing to be able to process and pay invoices.
Understand payment processes in Latin America
For an effective account receivables management in Latin America, you should understand local payment processes. Such payment processes may vary per country or region, and each company may have their own specifics. Generally speaking, payment processes may be subject to tax requirements, foreign currency exchange issues, short term or long-term economic circumstances, and administrative requirements imposed by law.
Correspondence and communication
How do you correspond and communicate with your clients in Latin America prior and during account receivables management? Which are the local habits? Do people generally communicate by phone, email or WhatsApp? Are there any recommendations from an administrative or legal point of view, to prevent receivables from becoming uncollectible in the future? Are original letters (still) required for formal notifications? What are the socially acceptable standards of professional communication in the countries of your clients?
Local support in Latin America
Will you be able to tap into local support in Latin America in case necessary? Any such necessity may be related to commercial representation, business consultation, due diligence, administrative follow up, account receivables management, debt collection or legal assistance.
Six topics I am brining up to prevent receivables from becoming uncollectible in Latin America are: your “know your client policy”, local legal context for contracts and other documents, the invoicing standards in Latin America, understanding local payment processes, standards for correspondence and communication with your clients, and establishment of local support in Latin America.
David Zannoni
If you are a foreign creditor and interested in learning more account receivables management for Latin America, please reach out to Cobroamericas, on Linked-In or follow us on Twitter.
To participate in conversations about debt collection in Latin America please join the Linked-In Group Debt Collection Latin America.
These alternatives are rather unattractive: the creditor will not like to remain with an unpaid or unsettled debt, and eventually, a write off, and the debtor might not like this situation either as it stands in the way of recovering the commercial relationship with creditor and it may harm debtor’s reputation in the business. And none of the parties will look forward to legal proceedings given the costs and time involved.
During the mediation process, the mediator will have joint sessions with creditor and debtor, and / or separate sessions with each of them, to understand the situation regarding the international debt or the dispute from each side’s point of view, and to learn about what each of the parties propose as solutions for the situation or the dispute. The sessions can with today’s technology, and depending on the size of the international debt, be organized in person or by teleconference.
The next stage is what is defined in mediation literature as “caucuses”: the mediator will start separate sessions and discussions with each of creditor and debtor to learn about their core interest, which elements of a settlement would be acceptable, and which are “no-go’s” or “deal breakers” for either creditor or debtor towards settlement of the international debt. The mediator will subsequently go back and forth between creditor and debtor with ideas, suggestions and proposals with the aim of finding a mutually acceptable settlement agreement. The mediator’s leverage here is that, although a settlement agreement will never 100% satisfy any of the parties, the alternatives – an unsettled international debt and loss of the commercial relationship and harm to a business reputation, or expensive and time consuming legal proceedings, are even less tempting.
Before you start negotiating, be sure you understand the circumstances of the debt. Why does debtor not pay? Is the creditor’s claim disputed or acknowledged? Does debtor have financial issues, short-term or long-term? Are financial issues business-related, sector-related or because of domestic economic, social, political or monetary problems (currently Brazil with an economy in regression, or several other Latin American countries like Colombia, Mexico and again Brazil who are dealing with heavy currency devaluations)? Can debtor not pay because they are subject to foreign currency controls (like Argentina or Venezuela)? Which alternatives do you possibly have if you do not accept to negotiate the international debt (insistence on full and immediate payment, legal proceedings to enforce payment, or a write off and end of commercial relationship)?
Equally as important as showing empathy for the debtor, is being straight in your communication with creditor. Never forget: you represent the creditor and your ultimate goal should be to gain as possible as possible from your negotiations during international debt recovery. From your negotiations, case by case, you will learn what the best possible achievement will be during the international debt recovery process. You should constantly communicate with creditor; explain to creditor the steps you are taking. What according to you is possible to achieve under the circumstances, and why. And which goals you set when you negotiate with debtor about the international debt.
Once you have reached a settlement, or you agreed with creditor and debtor on a payment plan, put the agreement on paper and make sure what the terms and conditions are, what is expected from debtor, and what debtor may expect from the creditor and from you if the agreement is honored and also when the agreement is not honored. It is important to give and take. Meaning that if debtor complies with the settlement payment or payment plan, he or she receives an official release letter and perhaps the door is open again for business between creditor and debtor. On the other hand, if debtor does not honor the agreement, it may mean that the full debt is claimed again by creditor, legal proceedings against debtor are started (if possible at all) or the commercial relationship between creditor and debtor is fully terminated.
If the international debt is between two businesses, both the creditor and the debtor may have an interest in maintaining the commercial relationship and solve any financial issues between them. This means that the debtor may be willing to pay and the creditor may be in a position to agree to a settlement of the debt, if necessary. We consider the existence of a commercial relationship and the importance of maintaining the commercial relationship as probably the most important leverage the side of the creditor may have during an international debt collection process.
Another important leverage the creditor may have is the alternative to start legal proceedings against debtor and to legally enforce payment of an outstanding debt. In reality though, often this alternative may be relative as legal alternatives for international debts are either limited, and / or time-consuming, and / or expensive. On the other hand, the fact that legal proceedings are time consuming and expensive also goes for the debtor, and this in itself may be sufficient leverage to push debtor to pay or except settlement.
Not unusually, creditor and debtor have been in business together a while and personal relationships have been established across departments and management. This may be another type of leverage the creditor may turn on when collecting a debt internationally. Depending on the size of businesses, there may be several people involved in the business relationship between creditor and debtor, and people may feel committed and may be willing to continue their personal relationships and avoid any personal issues as a result of the outstanding international debt. This leverage can also be used when attempting to collect an international debt, by involving in the negotiation people with a personal interest in the business relationship and personal relationships between them.
The importance of debtor’s industry reputation may also mean leverage for the creditor, when collecting an international debt. Debtor may feel that the existence of the international debt, and disruption of the commercial relationship because of the debt, if it becomes known within debtor’s industry, would damage debtor’s reputation. Some industries have warning lists for bad payers. The creditor, its legal representatives or its debt collection agency should definitely use this leverage, if present.
In first instance, it is of the utmost importance that you set the framework when you are collecting a debt internationally. Timelines, frequent and consistent following up by email and telephone, and if and when necessary, regular mail, means you set the rules of the game. You should almost show empathy, be professional, take into account the debtor’s situation and the circumstances that may affect speed and outcome, but at the end of the day your aim is to collect as much as possible, as fast as possible. Give debtor reasonable time between the follow ups to comply with what you request or agree, but make sure there are clear deadlines and strictly follow up on your own deadlines.
When communicating to collect a debt internationally, you must be aware of the leverage you have – or do not have. This determines whether you can demand full payment, should look for a settlement, can go legal or not, may consider accepting return of products or goods, and if there is a reasonable chance to reach an agreement on a payment plan. Leverage can be the existence of a commercial relationship the debtor still has an interest in to maintain or re-establish, the realistic option of enforcing payment legally if no payment is done or a payment agreement is reached amicably, or the reputation debtor wants to safeguard. Understanding the leverage, you have and using it in your communication is in our opinion is an absolutely essential tool for successful international debt recovery.
If the reason of an outstanding international debt is a dispute, international debt recovery turns into true mediation. If the situation requires so, and as often legal proceedings is a rather expensive, time-consuming and therefore unattractive alternative, in circumstances with a dispute involved, in reality the only serious option to recover part of the debt is mediation. Obviously the aim is to recover as much as possible, as fast as possible: as you will see, that should at all circumstances be the starting point. When you mediate between debtor and your client you will have to accept that the outcome will end up somewhere in the middle. You should always look for the best solution possible for your client, taking at the same time into account debtor’s (reasonable) arguments, situation, and circumstances.