Payment Terms and Financing Options to Maximize Sales While Protecting Against Nonpayment

Latin America and the Caribbean is a large and natural market for U.S. 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 U.S. exporters are unsuccessful in selling to Latin America or increasing their exports to Latin American buyers.  Frequently, U.S. exporters lose sales due to the payment terms they demand of their Latin American buyers. 

U.S. exporters should be aware that Latin American lending rates are far higher than those faced by companies in the U.S. For example, Brazilian lending rates range from 20 percent to 30 percent per year and Mexican lending rates range from 9 percent to 14 percent per year (as of January 2007).  U.S. 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. U.S. 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. U.S. exporter sells less to a Latin American client.  One Latin American company interviewed stated that it would purchase four times as much from its U.S. supplier if it was given 90-day terms rather than having to pay cash in advance.
3. U.S. 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 U.S. 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 U.S. 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. pen 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.

This document was published in printed form in summer 2007 thanks to the generous funding of PNC Bank and FedEx, U.S. Commercial Service Partners.

To read the full guide, please click on the links below for the:

English Version:  http://buyusainfo.net/docs/x_1197802.pdf

Spanish Version:  http://buyusainfo.net/docs/x_7091554.pdf

Portuguese Version:  http://buyusainfo.net/docs/x_5569363.pdf