Four questions before going legal in Latin American debt collection

Collecting a debt in Latin America may be a complicated and slow process. In the amicable phase, reaching a debtor, establishing contact, negotiating a deal and getting payments going may be generally enough. In several cases, amicably one will not be able to collect an outstanding debt.

Latin America legal debt collectionNaturally, the next step is to try to enforce payment of the debt through legal proceedings. However, and as already indicate before in our blog posts, in general one should be cautious and conservative when it comes down to starting a law suit in the attempt to collect a debt Latin America.

First, all possible amicable attempts must really be completely exhausted before even starting to consider legal proceedings. If amicable collections have not been successful, and no payment was done, or no payment plan could be agreed on, or the debt was not otherwise settled or compensated, then legal options for collections in Latin America should be assessed.

And when considering legal debt collection options in Latin America, please ask yourself the following four questions.

Is the debt large enough to justify legal proceedings?

legal payments Latin AmericaThe size of the claim is the first thing to look at. The larger the amount of the claim, the more likely it is that considering legal proceedings is justifiable. To answer this question and to determine whether the claimed amount is worth it or not to go legal, you must look at what the value of the claim is for your organization, as you will have to continue dedicate time and resources to the attempts to collect.

Does the location of the debtor make it possible to go legal?

Next item on the list is the location of the debtor. Where is your debtor based? As that is the place where you will start the law suit if you decide to try to collect the debt through legal proceedings. Whether or not a location (country, region or city) is accessible in practice for foreign creditors, varies substantially in Latin America. Currently, for example Chile and several of the Caribbean island nations have accessible legal systems. In other countries, because of a variety of reasons ranging from economical to political, trying to collect a foreign claim, is substantially more complicated (examples are Colombia, Brazil, or Mexico), and other countries are at this moment, practically impossible for foreign creditors (Venezuela is a notorious example).

Will your debtor be able to pay the debt, if legal is successful?

legal collections LATAMThe next step is to determine the reason; why has your debtor not paid? Are there financial issues? Or is the claim disputed by debtor? Is debtor currently in a situation which makes it under any circumstances impossible to pay, like bankruptcy or similar? It is essential to have an indication whether or not your debtor will actually be able to pay the debt, even if you win a law suit and obtain a legal title to collect.

Do legal proceedings justify the costs involved?

And finally, but very importantly, you should have a clear picture as to the costs involved of legal proceedings in Latin America. Now again, this may differ greatly between countries, regions and cities. What also affects the potential legal costs are the kind of legal proceedings, which may depend on age of invoices or available documentation. As a rule of thumb, going legal in Latin America is expensive, often too expensive looking at the amounts to be collected and the likelihood this will actually happen may be low.

If the answer to all four questions above is yes, then you should indeed consider trying to go legal to enforce payment of your claim in Latin America.

However, if the answer to even only one of the questions above is no, do not consider going legal, write the debt off as unrecoverable, and focus your energy on other business.

David Zannoni

If you are a foreign creditor and interested in learning more about legal debt collection in 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.

 

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Collecting Bad Debt in Latin America

Circumstances Affecting Collections Beyond Creditor’s Control

Collecting bad debt in Latin America often represents a challenge for foreign businesses.

There are several reasons to mention why businesses stop paying, which may be considered universal: bad economic circumstances, a company having liquidity issues, bad luck in business, mismanagement, and even bad intentions can be reasons causing bad debt anywhere one goes and does business.

However, there are a couple of circumstances which, maybe not exclusive to Latin America, do periodically characterize Latin American societies and economies, and therefore, affect businesses and ultimately also the collection of bad debt.

We will briefly discuss four of such circumstances.

Political Instability Causing Economic & Monetary Issues

Although this may vary substantially from country to country, and even within countries from region to region, political instability has been a common phenomenon in Latin America. Political instability may be visible through weakness of institutions, corruption, and policies imposed by the State contrary to the interests of the population, resulting in amongst others a lack of diversity in economy, underdevelopment in rural regions and impoverished urban areas, insufficient infrastructure, currency exchange controls and import / export tariffs in an attempt to protect the own economy. Political instability generally tempers economic growth and development and foreign investment. All these elements ultimately negatively affect the position of businesses, whether these are big corporations or small enterprises. Payment behavior may deteriorate and collecting bad debt may become more difficult. Countries like Argentina, Brazil, Venezuela, Mexico, Colombia, Ecuador, amongst others, have all been faced with some of these or similar issues.

Malfunctioning Judicial Systems Limiting Recovery of Bad Debt

Apart from a few exceptions, the legal systems in Latin America can in general be considered little accessible to foreign creditors.

From a foreign creditor’s point of view, judicial systems in Latin America can be perceived as complex, inefficient, closed minded, and incompatible. Often, there are no treaties in place between countries. This means that cross boarder issues are subject to local law in Latin America and the debtor’s jurisdiction applies if a foreign creditor wants to enforce payment of bad debt legally. In practice however, foreign claims are tough to enforce reducing the likelihood for collection and leaving the creditor with high, often unrecoverable legal expenses.

Infrastructure Missing Key Elements for Doing Business Globally

In several regions of Latin America, businesses are faced with a lack of infrastructure. This may include proper roads or airports, but also limited banking services and payment options, undeveloped educational institutions and professional support services, weak or absent authorities and limited or no access to the internet. Such business may be perceived as remote and difficult to reach for foreign creditors. Collecting bad debt can become a real challenge if debtors in more remote areas do not cooperate.

(Semi-)Informal Character of Business Preventing Sustainable Growth

The nature of doing business in Latin America can be very informal. This may allow a business to function locally but can cause issues when business is done internationally. For foreign creditors, the shadow side of the level of informality of businesses in Latin America can include: questionable financial management on the side of the debtor, limited options for local businesses to pay internationally, limited or no access for debtors to credit, and the fact that many business with a high level of informality are run based on a day to day strategy, without a long term vision. Because of this, the debtor lacks sustainable growth, which ultimately affect the creditor’s likelihood to collect bad debt.

In this post I mentioned four circumstances that may negatively affect collection of bad debts and which are typical for doing business in Latin America: economic downfall caused by political instability, malfunctioning of the judicial system, a lack of infrastructure, and the often (semi-)informal character of businesses in Latin America.

David Zannoni

 

If you are interested in learning more about typical circumstances that may negatively affect collecting bad debt in 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.

Escrow Accounts for Global Trade in Latin America

Several of the Latin American economies are considered emerging markets, and they offer excellent potential investment opportunities for foreign businesses.

However, when trading in unexplored markets, a main concern for foreign businesses is always: payment default on the side of the local business partner. Whether this means that your business partner in Latin America does eventually not pay for goods delivered of services provided, or that the partner defaults on a project you invested in.

 A solution that may assist you in successfully closing a global transaction in Latin America, is running your transaction through an escrow arrangement, by setting up a so-called escrow account.

How does escrow work?

The role of the escrow agent explained

escrow accounts latin americaHere is how escrow works. The escrow service provider, as “escrow agent”, will receive, hold and disburse deposits on behalf of the seller and buyer; or investors, or lender and borrower, as the case may be. The nature of the transaction can be investment, the purchase or sale of goods or products, or engagement of services.

Buyer, seller and escrow agent enter into a so called “escrow agreement” and the escrow agent opens an “escrow account” in which the buyer deposits the funds.

The escrow agent will subsequently hold the funds until an agreed cutoff date, as set forth in the escrow agreement.

If the conditions in the escrow agreement have been met – that is to say, if the seller has complied with the conditions as agreed between buyer and seller, pursuant to the escrow agreement – on or above the cutoff date, the escrow agent will forward the funds to the seller, and the financial transaction is successfully closed.

If the conditions are not met ultimately on the cutoff date – so in case the seller does not comply with what has been agreed between buyer and seller –  the funds will be transferred back by the escrow agent to the buyer, and the financial transaction is cancelled.

Escrow as tool to de-risk credit exposure in Latin America

The escrow agent acts solely as a neutral, trusted third party and does not have any other interest in the transaction as such. It protects the interest of both buyer and seller. It makes it possible for investors, buyers and sellers involved in international trade to substantially diminish financial risks, especially in those cases where there is no purchase on credit and / or a transaction is not covered under a credit risk insurance.

Therefore, escrow should be considered as a tool to de-risk payment default and credit exposure and should be taken in consideration by companies doing business in Latin America, in addition to other essential elements of best practices, such as credit insurances, receivables management, and debt collection.

Cobroamericas is a boutique service provider offering debt collection, credit consultancy and company research information services to international companies doing business in Latin America and the Caribbean.

If you are interested in learning more about escrow accounts for global trade in Latin America, please feel free to reach out to us, connect with Cobroamericas on Linked-In or follow us on Twitter.

To participate in the conversation about debt collection in Latin America please join the Linked-In Group Debt Collection Latin America.

Credit Risk Latin America: Four Services Providers for Small Foreign Businesses

Small foreign businesses run a certain credit risk when they do business in Latin America. If eventually, your counterpart does not pay, the financial impact on your company can be substantial and money and resources can be lost.

How can small foreign businesses protect themselves from such risks, when they enter the lucrative Latin American emerging markets? Here are four business partners you should consider as a small business owner.

Engage a Local Commercial Representative for Latin America

Latin america local representativeTo start with, engage a local representative for the Latin American market specialized in servicing foreign companies. The local representative can provide a local network of potential business partners and can help you enter the Latin American market. Also, it can assist with legal and administrative advice, do due diligence for you in Latin America, and connect you with reliable local lawyers, accountants and service providers. This might require a small initial investment by contracting a local company or individual representative on a retainer basis and eventually, you may want to consider establishing a local stronghold if the business requires so. It will on the long run bring you business, build up your local network and reputation, and limit potential financial and credit risks and therewith, save you money in the future.

An Insurance Company that provides Trade Credit Insurance

If international export or services is an important part of your business model, and Latin America is part of your foreign business expansion, you should contract an insurance company that provides credit insurance for international trade. There are several international insurance companies and government agencies that provide trade credit insurance for businesses that export internationally, and want to protect themselves from losses due to default, or insolvency or similar legal circumstances on the buyer’s side.

Escrow Arrangements for your Financial Transaction in Latin America

Latin America escrow credit riskDepending on the kind of products your deliver or services you provide, you may want to consider using an international escrow service provider to safeguard the financial transaction between your business partner in Latin America and yourself. This is how it works. An independent, third-party escrow manager will be engaged to open a segregated bank account, called the escrow account. Your business partner will pay a part of, or the full amount of the agreed purchase price for your products or services into the escrow account. Both parties will together with the escrow manager enter into an escrow agreement which will describe under which conditions the purchase price will be forwarded to yourself as provider. Such conditions will describe when delivery of the products or the services is considered delivery. Using an escrow protects you from the risk of a financial transaction in Latin America going wrong, whereby either your buyer can eventually not pay or you are the victim of intentional default or insolvency on the buyer’s end.

Account Receivables Management: a Collection Agency for Latin America

For your account receivables, make sure you use an international collection agency with a local partner in Latin America. They will be able to assist you with collections on outstanding and overdue invoices, and if necessary, provide debt collection services. This will eventually reduce your outstanding debt in Latin America to a minimum.

Small businesses that trade with Latin America run certain credit risks. As the owner of a small business with international ambitions aiming at Latin America, you should consider engaging as your business partners a local commercial representative, an insurance company that provides an international credit insurance, an escrow services provider to protect your position in a financial transaction in Latin America, and a collection agency for Latin America specialized in servicing foreign clients.

Cobroamericas is a boutique service providers offering debt collection, credit consultancy and company research information services to international companies doing business in Latin America and the Caribbean.

If you are a small business owner and are looking to expand business into  Latin America or the Caribbean, please feel free to reach out to us, connect with Cobroamericas on Linked-In or follow us on Twitter.

To participate in the conversation about debt collection in Latin America please join the Linked-In Group Debt Collection Latin America.

Collecting a debt in Latin America: three suggestions

Companies that do international business will inevitably be faced with bad payers, overdue invoices and eventually outstanding debts. For several businesses, one of the most challenging regions to collect a debt is Latin America. Here are three suggestions to keep in mind when dealing with debt in Latin America.

prevent debt Latin AmericaFirst of all, try to prevent facing a debt in Latin America. This sounds obvious. However, often we see that the reasons companies are faced with outstanding debt in Latin America lay within the very process and procedures prior to reaching the point of overdue accounts. Strategic decisions when a market is entered, compliance and due diligence, know your client policies when clients are signed, formats and setup of contracts, order forms and invoices, involvement of local commercial or legal presentation; it is essential that these are all focused on the specific environment of your clients’ region.

debt collection latin america timingOnce there is a debt: don’t wait too long taking action! We regularly see foreign companies who continue to chase overdue accounts following the same routine. It is essential to be decisive and take action soon when an account becomes overdue. The chance for success diminishes with the ticking of the clock. Engage your local collection agency if they have an international network or an international debt collector with experience in Latin America, to assist with the debt collection process.

Be realistic. Expectations management is important. Effective amicable debt collection in Latin America is certainly possible, be it however that there are certain regions which are more challenging. Reasons can be an economic crisis (Brazil), currency exchange rates (Colombia, Mexico), payment moral, amongst others. And some countries are very complicated (Venezuela is a notorious example). Legal is generally not recommendable; in most countries, foreign debt is hard to legally enforce, and often legal costs are substantial. It is important to get proper advice on your specific situation, to get an idea of collection options.

We have the following three suggestions for you when you focus on collecting debts in Latin America: try to prevent having to deal with debts, don’t wait too long taking action when facing debts, and be realistic and manage expectations as to debt recovery.

Cobroamericas is a provider of international debt collection services and focuses on collections in Latin America and the Caribbean. If you are interested in learning more about debt collection in Latin America and the Caribbean, please connect with Cobroamericas on Linked-In or follow us on Twitter.

To participate in the conversation about debt collection in Latin America please join the Linked-In Group Debt Collection Latin America.

Strategies for B2C Debt Collection in Latin America

It is generally very challenging to collect consumer debt in Latin America. The reasons are multiple and can include the following.

Reasons behind unpaid consumer debt in Latin America

  1. Low wages in the debtor’s country, limiting payment options substantially;
  2. Most of the countries in Latin America cope with dysfunctional legal systems, making legal options for foreign creditors unattractive, unpractical or impossible;
  3. Currency exchange rates may make outstanding foreign debt for consumers in Latin America overtime more expensive, which reduces the likelihood of fast recovery or any payments at all;
  4. It is typically a challenge for foreign creditors to locate debtors in Latin America. Registries or of poor quality, inaccessible or inexistent, and skip tracing options are either limited or expensive.

Payment or settlement of consumer debt in Latin America

b2c collections LATAMThis might paint a depressive landscape for the foreign creditor who is looking to claim payment of outstanding consumer debt in Latin America. Are there any positive aspects and options to indeed collect? Sure there are, and they depend on the following:

  1. Consumers living in Latin America may have an interest in having a clean sheet with respect to their outstanding debts, incurred abroad. At some point in their lives, they may consider returning abroad. This means they would want to look for a clean credit sheet abroad. This especially goes for foreign nationals living in Latin America, who at some point may want to return to their country of origin, or do business there;
  2. Technically, also foreign creditors may attempt to credit register bad payers in the country of residence in Latin America. This causes a negative credit rate, and entails that the debtor may run into problems when applying for mortgages or other credits locally. This may stimulate Latin American consumer debtor to pay or to settle outstanding foreign debt;
  3. Also in Latin America, as everywhere in the world, psycologically people may not like to stick around with potential financial problems. Aware or not of the possible financial consequences locally in their country, the feeling of having outstanding debts may cause uncertainty and may open the door for payment negotiations;
  4. Pride, reputation and prestige may also play a role. Being chased by creditors, also if they are from abroad, is for many people a reason to cooperate and looking for a payment solutions or settlement;
  5. Foreign creditors are likely to be a lot more flexible in negotiations than local creditors. At the end of the day, legal leverage and options are limited, and often foreign debt is an easier write off for foreign creditors. This means that the B2C debtor in Latin America will have the opportunity to negotiate a beneficial settlement deal, which might include a long term payment plan, a discount, or a combination. This may, it is attractive for the debtor to deal with the foreign debt, and to clean credit history abroad and potentially at home;
  6. For foreign creditors, a portfolio of foreign bad debt may offer a business opportunity. Written off debts may be attractive to international or local debt purchasers in Latin America. This way, the foreign creditor is at least partially compensated financially, and it does not need to further invest time and money in collections.

Tools for B2C debt collection strategies in Latin America

b2c debt collection latin americaFor foreign creditor trying to collect B2C debt in Latin America, the main interest is to get paid as much as possible, as soon as possible. What that means in practice is different for every creditor or every single debt collection case (depending on location of debtor(s), financial capacity, level of cooperation, leverage in Latin America) and is to be assessed on a case by case basis.

A couple of tools we recommend to look at for foreign creditors, to design your Debt Collection Strategy for B2C debts in Latina America are:

  1. Look for specialized local debt collector who works on a no cure, no pay basis; or an international provider with a local branch, collection partner or representative;
  2. To create local leverage to enforce payments from debtors in Latin America or negotiate settlements, check if you can credit register consumers at the local credit bureau, and offer debtors that they will be removed from the credit bureau once debt is paid or settled;
  3. Be prepared to offer long term payment plans to debtors in Latin America;
  4. Be flexible and offer debtors settlement options with discounts, in exchange for immediate payments;
  5. Look for specialized B2C portfolio purchasers, international or local Latin American ones;
  6. Use local law firms to pressure where possible and necessary, but where the rule of thumb should be no legal actions. A notarized letter from a local law firm, in combination with a call or a meeting, may be a strong tool to negotiate settlements with consumer debtors in Latin America.

Cobroamericas is a provider of international debt collection services and focuses on collections in Latin America and the Caribbean. If you are interested in learning more or discussing issues in connection with B2C debt collection for Latin America, or in connection with international debt collection in Latin America and the Caribbean, please connect with Cobroamericas on Linked-In or follow us on Twitter.

To participate in the conversation about debt collection in Latin America please join the Linked-In Group Debt Collection Latin America.

Credit Management for Latin America: Four Areas To Focus On

One of the fields companies should focus on when they do business in Latin America is to have a region-focused credit management. Here are four areas each credit management team should focus on when their companies do business in Latin America.

Due Diligence regarding Businesses in Latin America

The moment business relationships are built up in Latin America, and before actually closing deals, companies should do proper due diligence to make sure they are working with reliable business. Know your client, learn about their financial behavior, be aware of local economic, social and political circumstances of the place of business of your potential business partner: a good start means that potential issues and loss of money or business later on may be limited to a minimum. Have a look at this post if you would like to know more about due diligence in Latin America.

Account Receivables Management for Latin America

Latin America account receivablesOnce business operations in Latin America begin and your company starts closing deals, it is essential to have an account receivables management designed specifically for Latin America. To do so, cultural aspects, language requirements, knowledge of local socio-economic circumstances, currency controls, and potential legal matters should be taken into account. Design a strict account receivables management cycle, including regular email follow ups and phone calls, and be prepared to be flexible where necessary. It is important to closely cooperate with your sales or relationship management team, and local representatives of your company in Latin America, if any, depending on the size of the business. Sometimes a proper solution for companies may be to outsource (part of) the account receivables management in Latin America to specialized providers, who speak the languages, operate in the proper timezones and under local cultures and legal circumstances.

Debt Collection for Overdue Invoices in Latin America

Latin America collecting debtFor an effective credit management, it is important to have your debt collection options ready once the cycle of account receivables management has finished and there are overdue invoices payable by clients in Latin America. You should build up relationships with debt collection agencies or partners in Latin America who can assist you promptly once needed. If your company does substantial business in Latin America and there is continuous volume of deals, clients and eventually non-paying clients – debtors – you should have a pre-negotiated deal in place with an international debt collection agency with either a branch or partners in Latin America, to whom periodically cases are handed to collect the outstanding debts. If you would like to learn more about debt collection in Latin America, please have a look at our selection of blog posts about this subject by clicking here.

Latin America: Legal Support

Working out a commercial deal with a client in Latin America, (potential) legal issues that come up during the business relationship, or legal assistance during the process of receiving payment or collecting outstanding debts: for all these matters, it is recommendable to establish a relationship with an international law firm in Latin America, or several law firms locally in Latin America. They may assist your company from the very beginning of business operations in Latin America and prevent future issues and potential costs or loss of money and business. Please click here if you would like to know more about legal proceedings in Latin America.

Make sure you set up your credit management for your Latin American business operations properly by focusing on the following four areas: due diligence, account receivables management, debt collection and legal support.

Cobroamericas is a provider of international debt collection services and focuses on collections in Latin America and the Caribbean. If you are interested in learning more or discussing issues in connection with credit management for Latin America, or in connection with international debt collection in Latin America and the Caribbean, please connect with Cobroamericas on Linked-In or follow us on Twitter.

To participate in the conversation about debt collection in Latin America please join the Linked-In Group Debt Collection Latin America.