Commercial Collections in Mexico

Successfully Pursuing Debts
South of the Border

Collecting a commercial debt can be a difficult and complex enough proposition within the United States. What happens when the collections landscape shifts to Mexico?

This question is more relevant than ever amid the fast-growing trend of “nearshoring” — outsourcing business processes to companies in a nearby country.

Given that China has been at the center of the supply chain crisis, U.S. businesses are increasingly looking to work with closer-to-home suppliers in Mexico. In a survey released in December 2022, Capterra found that approximately 88% of U.S.-based small- and medium-sized businesses plan to shorten their supply chains by pivoting toward domestic or Mexican suppliers this year.

Ben Johnston, chief operating officer at the industrial equipment financing company Kapitus, told FreightWaves that “new regulations prohibiting the manufacturing in China of certain items deemed critical to national defense will drive additional high-tech manufacturing toward the U.S., Mexico, and other U.S. allies.”

In addition, Mexico’s lower labor costs could incentivize American businesses with domestic supply chains to work with suppliers south of the border. Unsurprisingly, industrial parks in Mexico experienced a record-high 97% occupancy rate last year.

So when it comes to nearshoring, American businesses must realize that the train is leaving the station — with or without them. Simultaneously, as Mexican companies become more involved in the supply chain, U.S. businesses will inevitably grapple with the issue of commercial debt collections in Mexico.

Collection Obstacles

Due to reduced regulations surrounding collections and business practices in general, Mexican companies tend to be less transparent about their financial information, complicating the commercial collections process.

Additionally, interest and collection costs are not standardized in Mexico like in the U.S., so Mexican debtors can use such fees as bargaining chips in negotiations. Also, the Mexican government does not regulate “dunning” (communication with customers to collect money owed for goods or services), making contact between creditors and debtors more difficult.

So, how can your business create a smoother pathway to collecting debts owed by  Mexican companies?

Mitigating the Risk

When dealing with exports to Mexico, one method for avoiding collection complications is to nip the problem in the bud by demanding payment before shipment or delivery. Other risk-mitigation strategies include requiring customers to execute a promissory note associated with the sale or obtaining export credit insurance for your receivables.

Maintaining thorough documentation for all contracts, invoices, order forms, order confirmations, and related correspondence is also strongly recommended if your company will be doing business in Mexico. Such documentation is often required in commercial collections, whether or not litigation is involved.

Forget About It?

Before pursuing collection in Mexico or any other country with a relatively chaotic regulatory environment, you should ask yourself: Is chasing the debt worth my time, energy, and resources?

If the outstanding invoice is small or overdue for more than one year, collecting the foreign debt could prove difficult and costly. You may be better off not pursuing the matter.

Collecting on Your Own

Before hiring a collection agency or pursuing litigation, you should issue a demand letter to the debtor to negotiate a settlement. Mexican law stipulates that a debtor isn’t required to pay unless the creditor makes a formal demand.

As leverage in these demands, creditors can warn debtors that their debt is being written off and reported to Mexican authorities. Mexico considers debt balances taxable income if creditors notify them of the write-off.

Regularly following up with the debtor and arranging a face-to-face meeting, if possible, can increase your chances of collecting the debt.

Need Help?

If the proper safeguards were not implemented before the sale, or your collection efforts fail to bear fruit, you may need expert assistance collecting commercial debt from Mexican-based businesses. The collection professionals at BARR Credit Services understand all the potential impediments to international debt recovery, including time constraints, taxes, local regulations, accepted business practices, and exchange rates.

Our dedicated team overcomes these obstacles while maintaining a professional and ethical approach to recovering unpaid balances. In addition, our involvement with the International Association of Commercial Collections (IACC) helps to strengthen our relationships with our Mexican neighbors. And our foreign agency connections and attorney networks are always available to assist us in collecting these debts.

Sources:
Featured Image: Adobe, License Granted
Capterra
FreightWaves
Bloomberg
Rosen Law
HMH Legal
Export-Import Bank of the United States