Avoid Bad Debt in Mexico

Mexico is one of the top trading partners of the U.S. and the relationship is only expected to grow as more companies look to bring production closer to home. Roughly 88% of U.S.-based small and medium-sized businesses (SMBs) will reshuffle their supply chains to use suppliers in the U.S. or Mexico in 2023, according to a recent survey  from Gartner-owned consultant Capterra.

A major shift in the global supply chain is already underway, said Luis Torres, senior business economist at the Federal Reserve bank of Dallas. “Some people define nearshoring as just U.S. companies moving their operations to Mexico, and others define nearshoring as any company that moves their production closer to their final export market,” he said. “For example, a German company moved from China to Mexico because their final export market is in the U.S.”

As trade ties between Mexico and the U.S. become closer, credit professionals should refresh their knowledge of the cultural differences in order to build strong relationships with customers. “I think Mexico is a complement for the U.S. when both countries are working together,” Torres said. “It’s good for the U.S. and it allows North America to become more competitive."

Gathering accurate and thorough information is at the foundation of any credit decision, but the way customer information is verified in Mexico is different. You will need a tax ID from a Mexican national to open an account on some online databases that provide information. For example:

MARCIA: Uses artificial Intelligence to search trademark names and images.

COMPRANET: Look up public contracts executed with the federal government through procurement.

RUG: Free registry that provides information on liens, security interest and loans filed against or related to your customer in Mexico.

SIGER: Here you can find corporate information on most companies incorporated in Mexico.

INEGI: Find information on Mexican territory, population and economy.

“I always stress to my clients that we have to do some preliminary or due-diligence investigations on our customers and don’t ignore red flags,” said Romelio Hernández , president of HMH Legal. “We need to know who they are, if they have any problems, who their shareholders are and verify that information by doing searches on those individuals to see if they’re jumping from company to company.” 

Don’t use the same terms and conditions in your credit applications for Mexico that you use for U.S.-based customers, Hernández added. Mexico will have a different legal system and some remedies under U.S. based terms will be inadequate under Mexican law. “Usually, we see terms and conditions that are focused on the U.S. market to make it work there,” he said. “But when selling to the Mexican market or any other country throughout Latin America, clauses within the terms and conditions can hurt U.S. exporters. Usually these are clauses you will have to work with a Mexican attorney or an attorney licensed to do business in the country because these terms are going to help the creditor enhance their position against their customers.”

Trade creditors must beware of any potential risk and secure credit transactions with collateral. The debtor should know that it is better to pay timely rather than face an expensive lawsuit. “You need to enhance the position of the creditor, and that’s what security devices are in place for,” said Hernández. “Something as easy as a pledge, title retention clause or a pagaré, which is a promissory note.”

You can learn more from Hernández and Torres at Credit Congress  from June 11-14 in Grapevine, TX.