Commercial Information in Central & South America

 
When companies take on expansion outside of their domestic environment, the lure of perceived opportunity can sometimes overwhelm good business practices.  When this is the case, due-diligence is often sidelined in favor “aggressive” efforts to penetrate a new/untapped foreign market.  Most Risk Management professionals understand that there are differences and greater inherent risks in dealing with international customers in unfamiliar environments.
 
Central and South America offer the tantalizing combination of emerging markets and the market’s desire (sometimes need) to import goods.  For many selling companies, this combination is impossible to ignore; but it is exactly that combination that makes Central and South America a potential drain on cash flow if not managed properly.
 
Just as exporting to different continents requires a level head and a steady hand, exporting into different countries (particularly in Central and South America) present problems and challenges peculiar to each country.  One must understand what are the “normal terms”, be aware of laws that may bind an action that you would take elsewhere and understand collection practices.
 
After the determination has been made that there is a market worth attacking, the first thing to do is evaluate the political/economic risk associated with the country in question.  In some countries in this region the political risk will outweigh the economic risk.
 
There are several sources that offer country evaluations that will aid in determining political/economic risk in each country.  Here are some of the sources with which I am familiar.
 
·         Bank Reports
·         Coface (http://www.coface-usa.com/products_services/country_risk_assessment.html)
·         Rundt’s Weekly (www.rundtsintelligence.com )
·         Periodicals
·         US Foreign and Commercial Service Reports (www.usatrade.gov )
·         FCIB Country Reports (www.fcibglobal.com)
·         FCIB Credit and Collection Surveys (www.fcibglobal.com)
·         FCIB Political Risk Reports (www.fcibglobal.com)
·         IMF (www.imf.org )
·         Country Agencies
·         World Bank (www.worldbank.org )
·         Colleges and Universities (Bryant College – www.itdn.net )
·         Local and Regional International Groups
·         Local Agents
·         Export-import Bank (www.exim.gov)
·         D&B Country Reports and Country RiskLine (www.dnb.com)
·         Icon Group (www.icongrouponline.com)
 
 
Compounding the issue is the fact that many credit insurers will not cover individual firm risks in some Central and South American countries (those that have a high risk rating) or may require Country Risk coverage, thereby increasing the cost of doing business.  This makes competing more difficult and puts a premium making good risk/reward decisions. 
 
The combination of increased competition and development of the Central and South American markets are encouraging except for the Risk Managers that are being called upon to make the really tough decisions on how much risk is too much risk.  These difficult decisions are made even more testing because many importing companies seem very co-operative, potentially increasing the pressure to approve risks based on that cooperation.
 
Robert Lucht of Veritas-USA comments, “In many Central and South American countries the desire to import product is so strong that these firms are extremely willing to supply information.  However, it is important to judge the reliability of the financials delivered.  It is not uncommon for a firm to maintain several sets of books, so it may be worthwhile to compare financials secured directly with what is reported to a credit reporting firm.”
 
This underscores a good reason for utilizing secondary sources of information to help validate information.
 
There are several sources of information that report on companies in all countries in Central and South America.  There is SkyMinder, (http://www.skyminder.com); Veritas-USA, (http://www.veritas-usa.com); D&B, (http://www.dnb.com) and companies in each country.
 
The following countries have domestic reporting organizations that develop reports on local companies.  All of the reporting organizations are members of The Latin American Business Credit Reporting Association, (http://www.alaic.com) and offer credit reports in specific countries as follows
 
Members of ALAIC
·         Chile - Trans World Serivces (www.tws.cl)
·         Argentina, Brazil - Sintesis (www.sintesis.com.ar & www.sintesisbrasil.com.br)
·         Columbia - Byington (www.byington.net)
·         Costa Rica - Protectora de Credito Comercial (http://www.protectora.com)
·         Ecuador - Infaes (general e-mail address @ ALAIC)
·         El Salvador - Altagracia Gregg (general e-mail address @ ALAIC)
·         Guatemala - Informacion Comercial Internacional (general e-mail address @ ALAIC)
·         Honduras - Honducredit (general e-mail address @ ALAIC)
·         Mexico - Profancresa (www.profancresa.com)
·         Panama - Tribaldos and Asociados (general e-mail address @ ALAIC)
·         Peru - Credit Report (www.creditreportgroup.com)
·         Uruguay - Sintesis (www.sintesis.com.ar)
·         Venezuela - Venezolana de Servicios Comerciales, Vesercom (general e-mail address @ ALAIC)
 
Each has differing information based upon country regulations, requirements and customs.
 
Financial Information
 
In Columbia and many other countries in South America, all companies are required to submit some level of financial information.  Publicly held companies, of course, are required to file reports with the country’s securities regulator.  Banks, Insurance companies, and other types of financial companies are also required to file specific data with appropriate agencies.
 
Mr. Diego Arboleda, Director of Byington in Columbia, states, “The DIAN (our IRS) receives full financial information on all companies but this is not publicly available.  The Chambers of Commerce receive most relevant figures including total, current, fixed and other assets, current and long term liabilities, net worth, sales and profits on a yearly basis.”
 
However, Mr. Arboleda cautions, “This public information is readily available but has some important quality limitations.  The Chambers do not perform any quality checks, so the user may find that the balance sheets don’t balance.  Also the Chamber asks for a) sales, b) cost of goods sold or operating expenses, and c) profit or loss.  The problem here is in the “or”. The reader may not be able to determine if the figure shown is a profit or a loss or operating expense or cost of goods sold.”
 
Payment Information
 
In most Central and South American Countries there is no commercial repository of payment information, so the payments that are displayed in reports are generated via references that are contacted and reported.
In Peru, Chile, Argentina and Brazil there is a “protestos” system that reports returned checks and collections and this information is publicly available.
 
Mr. Arboleda reports that in, Columbia, there is no “protestos” but there are credit bureaus that collect this type of information along with payment information but access to this data is only permitted when authorized by the subject company.  He also reports the following information based on the trade references collected by Byington – Columiba.
 
“Based on a period of one year, we established that 5.9% of 40,000 trade references taken, show terms under 30 days, 64.4% are between 30 and 59 days, 23.9% between 60 and 89, 4.8% between 90 and 119, .7% between 120 and 149, .1% between 150 and 179 and .3% over 180 days. On terms such as 30-60 days we used the average (45 days).”
 
Banking Information
 
Banking information is also difficult to obtain because this information is considered private and will not be released without authorization of the subject company.   This is typically done in the form of a release letter from the subject of the investigation and on company letterhead.  The information will take some time to be received.
 
Credit Report Analysis
 
When asked about analyzing credit reports from Central and South America when compared with reports from other areas, Mr. Arboleda replied, “I don't think the analysis should really be that different. The only thing I'd point out is that additional weight should be given to slow payments since they are hard to find given the privacy limitations shown above. For example, if a group of trade experiences shows 10 prompt payments and two slow ones, I would give very special attention to the two slow ones. The big difference really resides in how credit is extended and managed.  Invoicing has to be very careful and should de done as per local norms in case defaults take place and legal actions are required. Guarantees should also be obtained as per local norms. Most important, since, skip-tracing information is very limited and the legal systems are not efficient, it is imperative to take quick action against slow debtors. You cannot wait 360 days before contacting a local collection agency. My suggestion is, at the most, 120 days overdue.”
 
In general, commercial credit reports for countries in Central and South America do not approach the information available in commercial reports in the US or Western Europe.  In Columbia, Chile, Argentina, Peru and Brazil the report quality is good, in Ecuador the reports are improving.  However, due to historical issues and archaic public record systems, the other countries information sources are limited – and therefore report quality is less than ideal.
 
Although there are similarities in the kind of information available from each of these firms, the following chart (which can be found at www.alaic.com) compares several report providers and serves as an indication as to what information you may expect included in reports based on country.
 

OPERATIONS STATISTICS

Country

Average Response Times
in days

Report Content

Super Flash
Flash
Normal

With Financial Figures

With Complete Financial

No. of Trade Refs.

No. of Banking Refs.

Argentina
3
5
10
90%
80%
2
2

Brazil
4
5-6
10-12
70%
70%
4/5
N/A

Chile
2
3
7
67%
51%
3
3

Colombia
NA
4
8
90%
70%
4.6
3.4

Costa Rica
3
5
10
20%
20%
5
NA

Ecuador
2
5
8
90%
70%
2
2

El Salvador
1
3
5
95%
95%
3
2

Guatemala
3-5
5-10
10-15
95%
70%
3-5
NA

Honduras
Under Development

México
Under Development

Panamá
NA
4-7
10-15
60%
25%
3-5
3-5

Perú
3
5
8
80%
60%
5
3

Venezuela
3
5
10
80%
80%
4
3

 
In summary, when contemplating doing business with firms in Central and South America on open credit, understand that you will probably need to make decisions with less information from traditional sources than when evaluating firms in Western Europe or North America.  You will need to utilize other sources and methods like securing releases from local banks and credit bureaus in order to evaluate risk.  Don’t let the vision of an “untapped market” cloud good business practices or your cash flow will suffer.