Magazine article Business Credit

The Power of Culture: Achieving High A/R Performance in Latin America. (International Affairs Section)

Magazine article Business Credit

The Power of Culture: Achieving High A/R Performance in Latin America. (International Affairs Section)

Article excerpt

Latin America is going through an impressive change in the way business is done. Modernization of business processes is taking place all through this market. Globalization has arrived with the many trade agreements, and as domestic and foreign trade grows, modem business practices are coming into general use.

This sounds like an environment in which doing business is relatively easy. But, the truth is that there are still old ways of interacting among companies that have been there for centuries. For cultural reasons, this will probably never change. Understanding the local culture and having local accountability for accounts receivable are keys to generating high performance and controlling risks in the Latin American economy.

The Power of Culture

Operating successfully in Latin America requires a lot of working capital and a strong appetite for risk, or at least a good knowledge about how to manage it. Banks have a very low market penetration, so large manufacturers finance a huge portion of the distribution channel to make their products reach consumers. Credit is a common and available tool in the U.S.-almost a commodity, but a scarce, rare and luxurious item in most of Latin America. When well utilized, credit can give spectacular results in market penetration.

Offering credit means having to evaluate all kinds of customers, dealers, distributors and others in unknown markets, where the first great difference is culture. Granting credit in a Latin country is an entirely different way of doing business. There are, of course, the language and geographic differences, but these are the least of the challenges. A different country means a different culture and that is an entirely unique puzzle.

Credit Culture

Traditionally, credit is based on "name lending." For example, if everyone knows "Don Juan" and he owns the company, he should be credit worthy. He has always paid his debts and is a recognized person in the community with a lot of character and very high moral standards. But if he will not provide financial information, you cannot anticipate that he may want to pay you but cannot. Suddenly you are in the middle of a crisis.

Developing parametric systems is still difficult because historic information is lacking. The use of unsecured terms of sale is common, and secured schemes like a UCC filing are still in a development stage. Their creation is in a 'test' period ('prenda con desposecion') in Mexico, and utilization is complex with no legal experience.

Credit bureaus and formal credit evaluations are becoming more common. However, there is still a lot of resistance to providing financial information to creditors.

To detect problems in an early stage, monitoring unsecured risk requires very close follow-up and a strong relationship with the customer. The worst scenario exists among U.S. companies with sales and marketing people in Latin America, but credit and collections functions entirely in the U.S. Assessing a company and collecting from it are functions that require more than understanding the language. Knowing the business and cultural environment firsthand is paramount.

Close, direct contact with customers is critical in Latin America. Doing business from a remote location and quite possibly without bilingual associates is common in the U.S. In turn, it is common to find that the local customer contact forgets his second language when problems arise. Nothing beats local presence.

Only on Fridays, From 3 to 5

Probably another interesting issue is "payment culture." Delays of 30 days in the regular payment performance are considered 'normal' by Latin standards. For a U.S. company, coming from a payment culture where "X" terms means paying accordingly, a 30-day or longer delay can create a lot of problems. Eliminating those extra days requires a courteous, but firm and persistent local follow-up with the customer. …

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