April 2015

Managing Debtors South of the Border Protecting Your Investments in Mexico

Robyn Barrett, founder of FSW Funding, says stereotypes about Mexico may deter some lenders from extending credit into the country — a potential missed opportunity. She stresses that every country presents its own set of risks and challenges, and a proactive approach can temper risks and ensure a favorable outcome.

Robyn Barrett, Founder, FSW Funding

Robyn Barrett,
FSW Funding

Lending to clients conducting business with companies located in Mexico can be daunting. Naysayers often combine the hyperbolic media portrayal of a “lawless” Mexico with misguided information about regulatory processes. As such, many lenders are not willing to lend against Mexican accounts receivable due to the anticipated high risk of seeing receivables turn uncollectible.

While much of the apprehension is unwarranted, the truth is there are real risks involved with extending credit to companies located in Mexico because of its poor legal infrastructure. Many Mexican companies leverage and take advantage of the court system’s inefficiencies. In addition to questionable legal tactics, Mexican attorneys often thrive within a challenging and sometimes corrupt system. This practice is common partly because the attorneys have no mandatory bar membership that defines and regulates legal ethics. However, there is regulation and accountability for judges, but the system suffers mainly due to deficits in funding and synchronization.

According to Transparency International, Mexico ranked 106 out of 177 countries on the Corruption Perception Index, and received a disturbingly low corruption score of 34 out of 100. It is important to understand that every country presents its own set of risks and challenges, and taking a proactive approach can level the playing field. Limiting credit to Mexican account debtors can be a missed opportunity to expand into new markets.

Protective Measures

Whether you are factoring a local small business or one based in Mexico, it is imperative to take the necessary steps to shield your firm from harm. Measures must be taken from the very beginning to protect the collateral you are lending on. The collection processes differs when compared to the U.S. where incentives are created for parties to collect prior to going to trial. In Mexico, a majority of collection cases go straight to court, so it can be difficult to see where the incentive lies.

Verifying Your Client

Research is essential for the factoring firm and the company conducting business south of the border. Verifying your client is non-negotiable. Failure to analyze and verify your account debtor is a rookie mistake that will lead to a massive financial headache later on.

A quick Google search can reveal a lot about a potential customer, although in Mexico most public records — including incorporations, shareholder minutes and powers of attorney — are housed locally, and few states have a service online. Therefore, when you are in the process of confirming the credit limit for an account debtor south of the border, you must verify their application and financial information via email or fax to guarantee accuracy.

Due Diligence

The U.S. Department of Commerce’s International Trade Administration provides a host of services, including legitimacy, to U.S. businesses via the Trade Information Center of the U.S. Commercial Services (TIC). Provided that your business is licensed in the U.S., you can contact the TIC with the debtor’s information and they will assign a representative to help you establish if the customer is an authentic business partner. Take note that this process can be extensive, and reaching a conclusion may take longer than you expect. It may make sense to hire an attorney with expertise in international business to investigate the customer’s Public Registry of Property and Commerce. If the company is legitimate, it will be documented in the records.
Once the debtor is confirmed, you can procure credit information from the Mexican Credit Bureau. The only challenge is the Bureau won’t share information unless the lender supplies credit information to them. This is not a realistic option, unless you are funding a number of Mexican account debtors. Some of the larger U.S.-based credit bureaus provide international scores, but they are not always up to date and tend not to list small and medium businesses.

The best option is to examine public records based in the debtor’s town registry. Lenders can find a lot of information here about the debtor’s financial habits, as well as information on applicable lawsuits. Lenders should continue to assess the debtor on a regular basis to determine what measures should be taken to protect the creditor’s collateral.

Navigating Collections in Mexico

The best outcome is to get involved with a debtor that won’t end in collections, but since nothing is guaranteed, the first step in assuring potential collections go favorably down the line is to review a client’s application, and applicable terms and conditions at the outset of the relationship. The stronger the application, the better chance the lender will have of collecting.

As a precaution, it is recommended that the account debtor hire a specialist or attorney to aid in drafting the terms and conditions. Having a representative with this specialist experience is the key to securing assets when extending lines of credit. The attorney’s experience helps ensure your client is using the correct credit instruments, security measures and collection methods to reduce the inherent risks associated with credit and collections in Mexico.

In addition, it is advisable to exercise a form of promissory note known as a pagaré. This allows for an executive proceeding upon litigation. The proceeding will be quicker than a typical collection proceeding in Mexico. Also, it will be subject to less corruption and inexperienced judges and administrators. The pagaré also gives leverage and allows the seizure of assets shortly after the complaint is filed.

Once a lender has reached the collections process, it should be understood that collection letters don’t always suffice; instead, efforts should start with collection calls. Language barriers can be an obstacle, so it is best to first call the buyer that originally worked with the client to find out who the person of authority may be in case a personal visit is necessary to collect. Traditionally, face-to-face interaction is a more common practice in Mexico than sending a letter. This is also the most effective means of collecting, and the most expensive. For a lucrative client, it is well worth the time and money to send a representative to meet with the account debtor. If finance allows, hiring an attorney is also an effective option to exert additional pressure.

Legal Proceedings

If, after all avenues have been exhausted with a failure to collect on invoices, litigation is generally the next step. Before proceeding, you must ask yourself if litigation is worth the expense. Your answer will differ on a case-by-case basis. Keep in mind, most attorneys in Mexico do not operate on contingency, which means you might pay the legal expenses and still not successfully collect from the account debtor.

If you enlist legal assistance, it is essential to seek representation and counsel from an attorney located in Mexico that specializes in U.S. exportation. And it is paramount that you secure your ability to collect through the safeguarding process of utilizing the pagaré. If you face litigation, it will speed up proceedings. The collection process can be intimidating but if you have followed all the correct practices it can pay off.

Trusted Advisors

It is wise to proceed with caution, especially if you are setting out to conduct business in Mexico for the first time. Hiring an attorney off the bat is generally worth the investment. The attorney can act as your eyes and ears on the ground. This better positions you if you have to enter into litigation. Attorneys representing Mexican companies will often do what they can to slow down the process, but working with a lawyer who specializes in U.S. exportation mitigates some of that risk. The common thread through all aspects of securing assets when extending credit is to have key representatives in place.

In addition, BIEN (Building an International Economic Network) is a great online resource, especially for small businesses. This new Arizona-based, business-to-business e-platform allows companies and organizations to locate and contact one another to share best practices, find services and sell products. The site also acts as a research and networking tool to benefit those striving to do more across the borders with Mexico and Canada.

Although the poor legal infrastructure is a drawback, many advantages to traveling south of the border for business should not be overlooked. Every country and business venture carries its own set of risk and challenges. Establishing credit limits for companies in Mexico does not require you to reinvent the wheel, but additional measures need to be taken to protect your investment when expanding into this unique market.

Robyn Barrett is founder and managing member of FSW Funding.