Handling Credit Risk with Buyers in Latin America
By Eduardo Llamosa
Are they even there?
Handling credit in Latin America can be a challenge, particularly because there are many more factors contributing to risk in comparison to regular risk assessment procedures in the US. In the US, it may be possible to obtain a current and reliable credit report from a few different sources, all of which will have some information about your buyer. Some of this information is more reliable than others, but in the end, it will give you an idea of the risk you may be acquiring with your prospect at the time you grant credit. In Latin America, there are fewer sources and the information needed is sometimes more basic than that normally requested when credit-checking a US company.
Is There a There There?
In Latin America, while aspects of information vary from one country to another, in each the credit report should offer just about the same background and should help lower the risk of granting credit. The kind of information that is important in Latin America and that should be available includes: Who has the power to sign? Is the company legally constituted? Is it credit-active in its country? Does it have a good reputation? Is it really well established? Is the inventory really there? Does the company own the location or rent? Does it really exist?
This type of information is better obtained by someone in the country, someone who can actually visit the company in question. While US credit reporting companies often offer information on companies in other countries, many times that information has been purchased from other sources or obtained by having a call center in the US calling the overseas company. Therefore, review with the US credit provider how it obtains the information and from where, or contact a credit source in the target country.
Consider a Local Source
Information obtained locally should come from a trustworthy source, one that understands the behavior of the local economy and the people within their own culture. Many times, local credit agencies can even be contacted over the Internet. Whether the report is locally sourced or not, it should include, in addition to the information suggested above, trade references, the currency the local company uses for purchases and what typical terms are, up-to-date currency exchange rates, the legal form of the company, and who has powers of attorney. It is also very important to arrange for a personal visit from your credit reporting company so that the presence of the prospect is verified.
Local, trustworthy, well-established credit reporting companies may let you know about particular things to watch for in their own countries, and may also be flexible in providing other types of information or services that may be relevant to your operation. If you contact the Latin American Business Credit Reporting Association (www.alaic.com), you will find sources of information that may address your specific needs for most Latin American countries. Another good source is www.creditworthy.com, which lists credit providers, as well as reporting agencies by country.
Also, note that financial information may have different weight depending on the country. For example, in Colombia, the financial information must be provided to a public office by law; in Mexico only public companies have the obligation to do this. Therefore, financial information from a Mexican company may not be as relevant, since non-public companies may provide information in the form of a well-created balance sheet. (On the other hand, if the company has been audited for some reason, its balance sheet would of course be very relevant.)
Review Credit Decisions Often and Follow Events Affecting Local Conditions
In volatile economies, refresh information at least once a year, and follow the trends of the economy of the countries in which your customers reside. If you see risk because of a political change, changes in exchange laws, dramatic changes in the industry of your interest, or any other representative risk, take a closer look at the company again and ask your credit source to inform you of the possible risk factors it sees.
Reevaluating your portfolio from top to bottom once a year will support its value and is a good practice for any credit department dealing with international credit in Latin America. In addition, the content of a reliable credit report will be a very important item to have if you have to take your case to collection.
Problems may occur in long-lasting relationships, too. As in any commercial relationship, factors that change in each country's surroundings may change that country's domestic landscape and hence, local companies' behavior. Try to determine if any negative aspects are occurring only with your customer, or if they are occurring throughout the entire country. You can obtain reliable information from the commercial specialist at the local US embassy and a variety of other sources. Again, ask your local credit provider to help by monitoring your specific industry and letting you know when they feel there may be a risk involved. This may not be expensive and will certainly aid in credit decisions.
Lower the risk of your portfolio by filling out the right documentation in the local country. Documentation needs may be different for some countries, and it is very important to create a reliable file. Most files that are not correct were not correct from the beginning, and will not establish a strong foundation for a lasting relationship. Maintaining the correct items in your file will also let your customer know that you are doing things properly. Review the people involved too, since most relationships are built on personal contacts.
In summary, never complete a transaction without credit information, always file correctly, always investigate your prospect, find an informed opinion and the assistance you need, and follow the trends in the economy and of the industries where you have placed credit.
Llamosa operates ProFrancresa, a Mexican credit reporting agency, which also publishes information on the top companies in Mexico and Latin America. He can be reached at: email@example.com.
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