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.

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Settlement Negotiations In Latin America

You may have been in a situation that, while doing business in Latin America, your Latin American client refuses to pay because of issues.

Provided that your client is a professional party with good intentions, there may be plenty of reasons not to go for hardline collections or legal measures, but rather take on the approach of settlement negotiations.

The following are in our experience the most common categories of issues that may be the reason Latin American companies default on payments with foreign business partners.

Your Client May Have Financial Issues

Latin America financial issuesYour counter party might have stopped or slowed down with payments because it encounters financial issues. This could be because of business specific situations, including bad commercial decisions, mismanagement, start-up difficulties and therefore struggles with cashflow, or just bad luck with its products or services.

Sometimes the issues are sector related, and a whole sector may suffer because of natural disasters (epidemies, earthquakes, draught or wildfires), technological development with products or servicing becoming less needed or completely out of use, or otherwise.

And finally, your business partner in Latin America may suffer financially because of a whole nation or region being in an economic crisis. This can be de result of national economic circumstances (Brazil), political decisions (Venezuela), or national disasters (earthquakes in Mexico and hurricanes affecting Caribbean nations).

Exchange Rate Issues In Latin America

It could be that your debtor in Latin America is facing exchange rate issues.

This can be the result of economic factors, or political decisions. In recent years we have seen Colombia, Mexico, Brazil, Argentina and Venezuela, all to a larger or lesser extent, been affected by exchange rate fluctuations, especially the exchange rates with the US Dollar and the Euro, two of the main trading currencies for Latin American companies that do business internationally.

For companies that import from abroad, or use global services, prices of international products may rise substantially in a short period. If the volume is considerable, and especially if their markets are local and they earn in local currencies, unable to compensate for the increase in import costs, companies in Latin America may face serious issues because of changing exchange rates.

For more info on exchange rate issues in Latin America check out our previous blog post.

Product Or Service Related Issues

Latin America product issuesYour debtors in Latin America may have genuine issues with your products or services provided. Now this can be the result of bad expectation management on the debtor’s side, or mistakes in commercial communication between both parties. It can also be that the local markets, unexpectedly, do not embrace your products and your counter part in Latin America, being the middle man, fails to sell the products. Or your counter part feels it is experiencing problems with the delivered products or provided services.

If any of these issues apply to your debtor in Latin America, it is very important to consider settlement negotiations as opposed to hardline collections or legal proceedings, and here are five arguments why.

 Avoiding Legal Proceedings In Latin America

 Settlement negotiations are aimed at finding an amicable solution. By doing so, you will avoid going legal. This is highly recommendable as legal measures in Latin America are in general expensive, slow and often impractical or even impossible. Please read for more info our previous blog post about legal proceedings in Latin America.

Settlement Negotiations Reduce Costs

Focusing on settlement negotiations mean that the parties will intent to find an amicable solution within a limited period of time. This will not only avoid legal fees and costs, but also costs you would incur during the whole amicable collection process.

Settlement Negotiations Reduce Time Spent

Collection procedures in Latin America can be very slow and time consuming. By focusing on settlement negotiations, you will reduce the time spent substantially and therefore, you will have more time to dedicate on other, perhaps more rewarding activities.

Concrete Solution For The Outstanding Debt

The outcome of settlement negotiations should be a concrete solution, which is to be signed off by both your debtor in Latin America, and yourself. Concrete solutions reduce or even eliminate future misunderstanding and room for interpretation and discussion.

Solution Driven Approach May Save Commercial Relationships

Latin America trade issue solutionGoing for the solution driven approach of settlement negotiations, as opposed to hardline collections and legal, substantially increases the chances of saving the commercial relationship with your business partner in Latin America. This means you will not only collect outstanding amounts, but you will also continue to do business and earn money on your Latin American business partner.

The reason that your Latin American client slows down or stops paying your invoices, may be because they face financial issues, exchange rate issues or issues related to delivered products and services.

If the relationship between your client and yourself is genuine, it is recommendable to take on the approach of settlement negotiations. Five arguments in favor of settlement negotiations as opposed to hardline collections are: avoiding legal, reductions of costs, reduction of time spent, focus on obtaining a concrete solution, and a solution driven approach may save commercial relationships.

If you are interested in learning more about settlement negotiations in Latin America for outstanding debts and commercial issues, 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.