Debt Collection for Commercial Transactions in Latin America

To collect overdue payments owed in connection with a commercial transaction in Latin America, it is important to follow a step-by-step approach. Below are the stages of debt collection the foreign creditor should take into consideration.

Amicable debt collection for commercial transactions

The first step is to attempt to collect the debt amicably, generally on a contingency basis. This means that the foreign creditor will contract a debt collection agency. The creditor does not run any financial risk, as the agency will only charge commission in case of success. For the debtor, the involvement of a debt collector may imply to push needed towards a solution, which is full payment or a payment plan. Usually, a debt collection agency takes a couple of months to attempt to obtain an amicable solution for the overdue payment on the commercial transaction.

Mediation in case of disputes

Latin America commercial mediationIf amicable collections do not achieve payment or otherwise lead to a settlement, a pre-legal option could be mediation. If there is contact with the debtor but debtor does not pay the overdue amount, either because there is a dispute with respect to the quality of products or services delivered by the creditor in connection with the commercial transaction, there might be an interest on both sides to mediate and look for an alternative settlement. This may especially be the case if both parties have a continuous commercial relationship which they desire to maintain.

Claim assessment for the foreign creditor

In case amicable debt collection and if applicable, mediation do not result in payment, a payment plan or otherwise a settlement agreement between creditor and debtor, it is important to assess the claim for potential legal steps. At this stage, the presence and quality of a contract, order forms, confirmations, correspondence between the parties, and invoices regarding the commercial transaction is vital to determine legal potential.

Credit registration in Latin America

As a step in between pre-legal and legal, and to put pressure on the debtor, in some countries in Latin America it is possible to formally register the foreign debt at a public, semi-public or private watch dog. This can be a trigger for the debtor to pay or to come (or return) to the negotiation table.

Legal proceedings to enforce payment

Latin America commercial transaction legalShould credit registration not work either, or not be a possibility, and should the claim be solid enough to enforce payment of the overdue amount legally, then the final alternative to collect a debt on behalf of a foreign creditor is to start legal proceedings against the debtor. Legal proceedings should be started in the country of residence of the debtor. In addition to an assessment whether the claim is solid, creditor must also look if it is worth proceeding from a cost-perspective.

The stages a foreign creditor should follow to collect an overdue payment on a commercial transaction in Latin America are: amicable debt collection, mediation, claim assessment, credit registration, and legal proceedings.

David Zannoni

If you are a foreign creditor and interested in learning more on debt collection in Latin America for commercial transactions, 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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Major Issues for Debt Collection in Four Latin American Markets

Collecting a foreign debt in Latin America can be challenging. Periodically, one is faced with major issues which complicate debt collection.

Below are four of Latin America’s biggest markets and major issues that may arise attempting to collect a debt on behalf of a foreign creditor.

Debt Collection in Argentina: Currency Issues

Argentina debt collectionArgentina’s economy has gone through several cycles the last few decades and the country has faced a deep economic crisis. Two of the major issues creditors and debtor have had to deal with are currency devaluation – the value of the Argentinean Peso dropping substantially as against the US Dollar – and foreign currency exchange restrictions as imposed by federal government. These two issues are interrelated and have negatively affected each other, resulting in considerable payment issues for debtors in Argentina, uncollectible claims for foreign creditors, and red flags for global creditor insurers because of negative credit rates.

Debt Collection in Brazil: the Challenge of the Economic Crisis

Brazil debt collectionConsidered one of the most influential emerging markets and part of the so called BRIC nations, Brazil experienced impressive economic growth and a rise in overall prosperity at the beginning of the 21st century. However, it fell into a severe economic crisis in 2014, from which it is currently still recovering. The Brazilian currency, the Real, devaluated as against the US Dollar and several businesses went bankrupt or otherwise have had difficulties paying outstanding invoices to foreign creditors.

Debt Collection in Mexico: Informality and Challenging Legal System

Mexico debt recoveryOne of the most open economies of Latin America, Mexico has passed through the global financial crisis that started in 2008, relatively unharmed. In fact, its economy has been growing for the last few decades and is considered an emerging market with great opportunities for foreign investors and traders. However, the challenges for foreign creditors in Mexico are the level of informality in daily business, as well as it’s malfunctioning legal system. These factors make debt collection in Mexico a challenge from time to time, and legally enforcing a foreign claim impractical and virtually impossible.

Debt Collection in Venezuela: Hyperinflation and Currency Exchange Controls

Venezuela debt collectionVenezuela has unfortunately been hit by one of the most severe economic and monetary crises of the century. Hyperinflation has lead to a collapse of the local currency, the Bolivar. Foreign currency exchange restrictions have made it almost impossible for local businesses to buy US Dollars, Euros or other foreign currencies. In combination with the collapse of the Bolivar, this has made it virtually impossible for local debtors to pay foreign creditors. Venezuela is one of the most difficult nations on earth for debt collection and a foreign debt can in most of the cases, by default and as a rule of thumb, be considered uncollectible and a certain write off.

Looking at respectively Argentina, Brazil, Mexico and Venezuela, we notice that the following are some of the major issues debt collection faces: currency devaluation, foreign currency exchange restrictions, economic crisis, informality, malfunctioning legal system, and hyperinflation. Most of these major issues, through the last decades, have manifested, to a lesser or larger extent, in all the countries mentioned and many other countries in Latin America and will likely continue to affect debt collection in the future.

David Zannoni

If you are a foreign creditor and interested in learning more major issues for 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.

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.

 

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.