A couple of months I had a meeting with a business owner that has been trying to export to Latin America for the last 3 years. She has an excellent product, offers great service and her business package as a whole yields great potential. So we spent a couple of hours talking about the possible reasons why she had repeatedly failed to bring one of her projects to fruition.
While it was clear that her attempts to break into the market failed in numerous countries, we decided to talk about one market in particular which is Brazil. A lot of businesses fail to enter that country mainly due to a couple of reasons: the very heavy taxes/duties imposed on foreign goods and the cultural differences and language barriers between the United States and Brazil.
In this particular case however, it was clear that one of the potential reasons could be narrowed down to the payment terms established during the early negotiation stages. Currently in Latin America, Brazil leads the market in annual lending interest rates ranging anywhere from 19 to 32%. Typically, as she has done with companies in Europe and Asia, her company required a 50% downpayment in order to begin manufacturing and the other 50% balance would be paid once goods were delivered. While this method of payment, along with LC’s (letters of credit), are leading choices for doing business with international markets, they can have a negative effect in transactions done with Latin America partners.
The business culture in Brazil and throughout Latin America as a whole is a culture of trust. Yes, it is ok to ask for a downpayment, but you have to be very careful about how you ask for it. Business people understand you carry a risk but you must avoid using examples and direct emphasis on the “what if’s”. Rather, try to explain and highlight the benefits of that this could bring to their business and to the relationship between the companies. For example, “if you are able to provide us with a 50% downpayment, we will be able to negotiate better rates in advance” or “we could secure better pricing for the raw materials”. I am, BY NO MEANS, asking you to come up with a story to sell or to tell to your client, but rather, emphasize the TRUE benefits – I am sure you can come up with one or more.
If you are selling US$ 200,000 worth of goods, and you are require of them to give you US$ 100,000 as a downpayment, keep in mind that in some cases, the client will have to spend an additional US$ 10,000 to 20,000 depending on how long it takes them to turn the product around and to recoup their original investment. If you offer an item that is too innovative (is there such a thing?) and that will take longer to turn around, then this could turn potential clients away. You also have to keep the local competition in mind as they have a much better understanding of the market place and culture than you do; if they can offer better financing terms than the ones offered by you, then that puts you out of the competitive group.
Considering financing payment terms over a longer period of time could scare some businesses away. However, some US banks or financial institutions will allow for this if you have a purchase order in hand and if the buying agent has done several transactions before under similar terms and have proofed to be a reliable client (even if it has not been through you). Needless to say, you will have to spend some time researching your client and ensuring that they will pay, but, remember that trust and payment terms are extremely critical to enter a new market place.
I am glad to say that Mrs.X received her very first purchase order from clients in Brazil and in Mexico; both extremely strong markets that shared similar financial obstacles but also share tremendous growth potential. While the issues were not with the product she offered or the services she facilitated, there were issues that could be addressed in the financial terms she offered and most importantly on how they were offered and presented to the client. Flexibility goes a long way and keeping an open mind certainly helps.
