By Rita Gordon-Gay, President, Credit Report Latin American SAC
Central and South America present a complex landscape for businesses seeking to expand their operations. The potential for growth in these diverse markets is significant, yet fraught with challenges that require careful navigation. In this article, we will explore the potential of Central and South America as a viable market for industries, focusing on Business reports and credit information “on demand” we provide to Trade credit insurance agencies, trade credit underwriters, and other members of the Berne Union and ICISA since 1964.
Most risk management professionals will appreciate that there are differences, and greater inherent risks, in dealing with international customers in unfamiliar environments. These lines provide an insight on the challenges associated with information gathering and commercial credit application processing in Central and South America.
When companies expand outside of their domestic environment, the lure of the perceived opportunity can sometimes overwhelm good business sense. When this is the case, due diligence is often side-lined in favour of aggressive efforts to penetrate a new and untapped foreign market.
Due diligence and understanding local practices
Central and South America offers the tantalising combination of emerging markets and companies which display a strong ethic for important goods and services. For many foreign companies, this combination is impossible to ignore, but it is equally impossible 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) presents problems and challenges peculiar to each country. One should quickly develop a very real understanding of what is meant by ‘normal terms’, and one should be aware of local laws and collection practices. Compounding the issue is the fact that many credit insurers will not cover individual firm risks in some Central and South American countries, (even more if those that have a high-risk rating).
The increasing competition allied with the development of individual country markets in Central and South America are encouraging signs for the industry, although this means that risk managers are called upon to make ever tougher decisions about what constitutes fair risks and unacceptable risks.
In many Central and South American countries, the desire to import products is so strong that these firms are extremely willing to supply information nevertheless it is important to consider 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 financially secure directly with what is reported to a credit reporting firm.
Case studies: lessons from the field
A few years ago, we assisted a multinational company in assessing the creditworthiness of a large distributor in Argentina. This client was considering extending a significant credit line to support expansion into the market. However, amid Argentina’s political shifts and fluctuating economic policies, our detailed business credit reports revealed discrepancies in the distributor’s financials, which differed from the information provided by the company itself. The instability in the regulatory environment further complicated due diligence, as policies changed frequently, impacting both tax obligations and import/export restrictions.
What stood out to us was how quickly political and economic volatility in some countries can escalate the risk profile of even established businesses. We recommended a more cautious approach, including securing trade credit insurance and continuously monitoring the distributor’s financial health through our local reporting partners.
This experience underscored the importance of adapting strategies to the local environment and maintaining a flexible, risk-aware approach. By doing so, the client managed to proceed with mitigated risks, proving the value of thorough credit analysis and ongoing market monitoring in complex regions like Central and South America.
Likewise, last year, we worked with a global manufacturer expanding into the Brazilian market. This client faced significant challenges due to the volatility and regulatory hurdles typical in Brazil’s business environment. At the time, they were eager to penetrate the market quickly and take advantage of Brazil’s growing consumer base, but in doing so, they side-lined comprehensive due diligence.
We conducted a thorough business credit report and market analysis on their local partner, which revealed financial discrepancies and a lack of transparency in accounting practices. Despite the local partner providing seemingly solid financials, our data from local sources suggested that they maintained multiple sets of books. By carefully comparing the financial data with reports from our local partners, we uncovered a higher risk profile than initially presented by the client’s local partner.
This case underscored the importance of understanding the local business landscape and adapting to challenges like political instability and financial reporting practices. Our client proceeded with a more cautious and risk-managed approach, including considering securing trade credit insurance and monitoring the market closely. This approach ultimately saved them from potentially significant losses, demonstrating the vital role of due diligence and the proper use of business credit reports in emerging markets.
This example aligns with the trends and risks of the region, particularly the need to navigate local complexities and avoid letting perceived opportunities overshadow prudent risk management.
Balancing growth with risk mitigation
As a Conclusion Central and South America offer a unique blend of opportunities and challenges for global businesses. By leveraging trade credit insurance agencies, business credit reports, and comprehensive market analysis, companies can effectively assess the potential of these markets.
While risks exist, the potential for significant returns makes Central and South America an attractive option for businesses with the resources and expertise to capitalize on the opportunities presented.
In summary, Central and South America’s untapped potential provides a promising avenue for growth, provided businesses are equipped with the right tools and strategies to navigate the complexities of these markets.
Source: Credit Report PDF
