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Due Diligence for Financial Transactions in El Salvador: A Guide
El Salvador’s banking system has undergone significant changes in recent years, with the establishment of a new regulatory agency and the introduction of stricter laws governing financial transactions. For US companies looking to do business in El Salvador, it is essential to understand the due diligence requirements for financial transactions in the country.
Methods of Payment
The US Commercial Service advises against sending shipments without agreeing on payment terms in advance and receiving proper bank documents. Advance payment or an irrevocable letter of credit are recommended for initial commercial transactions until a well-established relationship based on prompt payment and contractual obligations is established with the Salvadoran counterpart.
Letters of Credit (LCs)
- LCs are among the most secure instruments for international traders, providing protection for both buyers and sellers.
- LCs can be useful when reliable credit information about a foreign buyer is difficult to obtain.
Open Account Transactions
Open account transactions among established business partners are used in El Salvador, where goods are shipped and delivered before payment is due, usually in 30 to 90 days. This payment method is the most advantageous option for Salvadoran importers in terms of cash flow and cost but poses a higher risk for US exporters.
Trade Finance Options
To mitigate this risk, US exporters can consider using one or more of the following trade finance techniques:
- Export working capital financing
- Government-guaranteed export working capital programs
- Export credit insurance
- Export factoring
Most banks operating in El Salvador offer factoring services, such as Quedex and Inter Corp.
Local Credit-Rating Agencies
El Salvador has three authorized local credit-rating agencies:
- INFORED
- Transunion El Salvador
- Equifax Centro America
- These agencies provide financial history and credit management services for both individuals and businesses.
Payment Methods
Primary credit and charge cards used in El Salvador are:
- Visa
- MasterCard
- American Express
The maximum interest rate for credit cards and loans is 1.6 times the simple average effective rate established by the Central Bank.
Collection Agencies
El Salvador’s collection agencies are not regulated but are often run by legal professionals. US companies can consider working with reputable law firms that offer extra-judicial collection services.
Banking Systems
The Financial System Superintendency (SSF) is the independent agency responsible for authorizing and supervising all financial institutions in El Salvador. The Central Bank regulates the financial system, administers international reserves, manages the payment system, and provides oversight to banks operating in the country.
List of Banks in El Salvador
Here is a list of some of the major banks operating in El Salvador:
- Banco Agrícola S.A.
- Banco Azul
- Banco Cuscatlán de El Salvador, S.A.
- Banco Davivienda Salvadoreño, S.A.
- Citibank, N.A. Sucursal El Salvador
- Banco Promérica, S.A.
- Banco de América Central, S.A.
Conclusion
In conclusion, due diligence for financial transactions in El Salvador requires careful consideration of various factors, including methods of payment, open account transactions, trade finance options, local credit-rating agencies, payment methods, collection agencies, banking systems, and the list of banks operating in the country. By understanding these requirements, US companies can navigate the complex landscape of El Salvador’s financial system and make informed decisions when doing business in the country.