Getting paid by your Latin-American buyer

Latin America and the Caribbean is a large and natural market for US exporters due to the region’s geographic proximity. The region has a total population of 546 million people and a Gross Domestic Product (GDP) of nearly $2.5 trillion. The region is also home to two of the world’s largest economies, Brazil and Mexico, whose combined GDP is over $1.5 trillion. Despite the sheer size of this market, many US exporters are unsuccessful in selling to Latin America or increasing their exports to Latin American buyers. Frequently, US exporters lose sales due to the payment terms they demand of their Latin American buyers. US exporters should be aware of the fact that Latin American lending rates are far higher than those faced by companies in the US. For example, Brazilian lending rates range from 20% to 30% per year and Mexican lending rates range from 9% to 14% per year (as of January 2007). US exporters are losing sales to Latin American buyers because they are frequently demanding payment either by Confirmed Letter of Credit or Cash In Advance. This can result in the following situations: 1. US exporter fails to win new sales contracts or loses existing Latin American clients because other foreign competitors are willing to provide the Latin American buyer with open account terms. Some Latin American companies pay more just to get 30 or 60-day open account terms. 2. US exporter sells less to a Latin American client. One Latin American company interviewed stated that it would purchase 4 times as much from its US supplier if it was given 90-day terms rather than having to pay cash in advance. 3. US exporter loses medium term sales contract, because a foreign competitor assists the Latin American buyer in achieving better financing terms. While it is prudent for US exporters to insist on secure payment terms, it pays for them to consider the broad variety of payment terms available to them in order to become as competitive as possible. The purpose of this guide is to identify the main financing and payment mechanisms available to support US exporters selling to Latin America in general and to understand the costs, advantages, and disadvantages of each mechanism. This guide is an introduction and the reader is encouraged to use it as a starting point in order to become more familiar with the subject. In many instances, the use of expert help is recommended. To that end, the following mechanisms will be examined in this report: 1. Cash In Advance; 2. Confirmed Letter of Credit; 3. Open Account Terms; 4. Open Account Terms with Export Credit Insurance; 5. Documents Against Payment (D/P) & Documents Against Acceptance (D/A); 6. Export Finance by a US Commercial Bank (US$ denominated); 7. Import Finance by a Latin American Bank (Foreign Currency denominated); 8. Lines of Credit Available from Latin American-based Development Banks; 9. Sales to foreign public sector buyers with foreign Central Bank Guarantees are also addressed. If you sell to a country that has high interest rates and you demand cash in advance or a letter of credit from your buyer, you will likely sell less and may even lose the sale to a competitor who is willing to provide better payment terms. Why? Simply put, when a company, any company, is faced with high interest rates, they will do everything they can to avoid borrowing money. This includes: 1. Buying less. 2. Not buying at all. 3. Paying more to buy on open account terms. 4. Buying inferior product if it is being sold on open account terms. The following example highlights what many Latin American Companies face when trying to decide what and how much to import: Imagine that you are a buyer in Latin America and you want to purchase $100,000 worth of widgets from a US exporter to stock your warehouse. It will take approximately 30 days for the widgets to arrive and then it will take another 90 days to sell the widgets. In addition, your local client will demand 90 days to pay you. In total, then, you will only be paid for the product you purchased from your US supplier 7 months (210 days) after you purchased it. • In Brazil, if you took a line of credit where interest rates are approximately 2.2% per month, you will pay your bank $16,454 in interest (compounded monthly). • In Mexico, if you took a line of credit where interest rates are approximately 1.1% per month, you will pay your bank $6,784 in interest (compounded monthly). If you are interested in pursuing any financing options, or are interested in learning more about export opportunities to Latin America you may visit www.buyusa.gov/tradeamericas/