Cutting Brazilian Red Tape [U.S.-Latin Trade magazine]
by Hope Katz Gibbs
U.S.-Latin Trade magazine
IMAGINE MAKING THE DEAL OF a lifetime in Latin America, only to realize you can’t get a bill of lading or a draft agreement for three months. When you finally do get your product overseas, you find you can’t collect your money because the bank has frozen the funds, or the company you thought was profitable had really been creative with their balance sheet.
Is that enough to send you into another line of business? Don’t sweat it, says Monique Merriam, a former international banker who in 1990 opened Washington, D.C.-based Geofinance Ltd., a finance company which caters to small and medium U.S. exporters struggling with the bureaucracy in Brazil.
“There is a need for people who are willing to work with smaller export companies to finance them overseas,” says Merriam, 39. “In response to that need a lot of boutiques like ourselves have sprung up that focus on particular product lines. In our case, the focus is on a particular country: Brazil.”
UNTYING A KNOT
Merriam’s largest client is the North American Export Agency, a Flushing, New York, company that exports diesel generators to the Amazon region in northern Brazil. NAEA’s president, Juarez Baffeto, has been working with Geofinance for the past two years.
Prior to that, his company—which currently has annual sales of $5 million—suffered the frustration of having $2 million in payments blocked by the Brazilian government. Barreto says he visited the Central Bank of Brazil about 30 times but couldn’t get his money. Stymied, Baffeto turned to Merriam; the two had known each other when Merriam worked for Maryland National Bank in the late 1980s.
“She knew how to get my money,” he says. “She charged 2 percent, and in two months I had the cash in my hands.”
Today, Geofinance has shifted from offering financial advice in areas such as cash transfer (i.e., unfreezing blocked Brazilian funds), foreign acquisitions and debt conversion, to its current specialization in trade finance. The company operates primarily by purchasing payment drafts from U.S. exporters at a discount, then collecting from the Brazilian importer subsequent to shipment.
Geofinance currently does about $50 million a year in draft business and has about 15 regular clients who sell Brazilian drafts to it every month, says Merriam. A handful of other clients utilize her company about once a year.
Still, it isn’t easy to do business in a country that had economic growth of negative 1.5 percent last year. For this reason, Merriam maintains a staff of four at the company’s Sao Paulo office. They are responsible for checking on the balance sheet of Brazilian importers.
“They worry about collecting and making sure the importers credit situation is soluble and that he is going to pay,” says Merriam. “Last month in Brazil inflation was 28 percent. That could wreck havoc on a company’s balance sheet if it’s not properly managed.”
In the last year Geofinance has also added eight sales agents throughout the U.S. who act as independent contractors and are paid on commission. They are located in Miami, New York, Hartford, Conn., Boston, Chicago, Houston, San Diego and San Francisco. Similarly in Brazil, about half a dozen agents in different cities bring Geofinance business on a commission basis.
THE ART OF THE DEAL
The structure of the transaction begins with the exporter, a U.S. company, and the importer in Brazil, who is subject to approval by Geofinance. Amounts of drafts range from $50,000 per transaction to a maximum of $10 million.
To execute the transaction, a Brazilian importer will request price quotes from the exporter. The exporter sends a pro forma invoice, which the Brazilian importer signs off on. The Brazilian importer then obtains an import license in Brazil and sends a firm purchase order to the U.S. exporter.
Next, the exporter presents a bill of lading for shipping to Geofinance for discounting. Discounts vary from 3% to 10%, depending on the credit risk of the Brazilian importer and the terms of payment. Geofinance pays the exporter, then sends the draft to Brazil for collection.
For the exporter, Geofinance provides working capital and reduces paper work. “We allow him to concentrate on his business, which is making his machine, and not worrying if he is going to collect from some distant country he doesn’t know very well,” says Merriam.
For the importer, Geofinance cuts through the red tape of formal bank procedures. Merriam explains: “The banks in Brazil are charging very high rates for letters of credit. Our method is much simpler, it’s much quicker, and it’s much easier. Our contract is about 2.5 pages long, as opposed to a letter of credit document which is dozens of pages.”
NICHE TRADE FINANCING
Merriam says she is confident her business will continue to grow because she has found a niche few banks want to touch. “What happened was that after the debt crisis in the beginning of the ’80s, most of the regional banks retrenched completely. Now, there are few groups willing to provide trade finance in difficult countries for small- or medium-sized companies.
“You can get your money center banks [Citibank, Chase Manhattan and Bankers Trust] to listen to you, but they are going to want an export of $20-$30 million. They don’t want to deal with a fellow who has a $200,000 machine to sell in Brazil. There are many of those types of companies.”
The most aggressive banks now are the European banks, notably the French, she believes. However, these banks, similar to their U.S. counterparts, tend to focus mostly on the international financing business of the Fortune 500.
“They do provide longer term financing than we can,” says Merriam. “We’d like to be able to extend our tenor, but paying the kind of interest rates we have to for a Brazilian venture we can’t do that right now. We need to raise longer term capital.”
So, for the first time since its inception Geofinance is seeking investors. Currently, she is tapping a group of Brazilians based in Rio de Janeiro to establish a revolving line of credit program that will be sold in Brazil. The increased credit line will help her attract other investors who will provide additional credit to buy more drafts.
In the next five years she also plans
to open an office in Mexico and another in Argentina. For the immediate future, though, Geofinance is going to expand business in Brazil—a plan that is not without risk.
THE BRAZILIAN CHALLENGE
“I expect the economy to get worse,” she admits. “Inflation is so difficult. It is hard for someone living in this country to imagine what 28-29 percent per month inflation means. That’s 1 percent per day. It makes every aspect of doing business extremely unstable.”
This, says Merriam, is part of the challenge.
“I find it a fascinating economy because of the financial difficulties there,” she says. “It allows for an enormous amount of creativity. If you notice, some of the big U.S. companies such as Dow Chemical hire Brazilians to be their treasury people. This is because Brazilians are extremely creative when it comes to finance.”
What thrills her most is that when you wake up in the morning and pick up the newspaper, you’re never sure what legislation has changed, whether they have gotten rid of the finance minister, or if they have changed the currency.
“You have to constantly be reacting to new situations and to change and adapt your business to meet those needs so you don’t become stagnant,” she concludes. “It’s a rush.”