NAFTA smart Featured

8:00pm EDT October 26, 2009

In 1994, the North American Free Trade Agreement (NAFTA) between the United States, Canada and Mexico created the world’s largest free trade area. Today, NAFTA links more than 444 million people producing more than $17 trillion worth of goods and services annually.

U.S. companies of all sizes are benefitting from new opportunities in Canada and Mexico, but there are complexities to managing a business across multiple borders. From the perspective of a financial professional, the challenges of supporting expansion into Canada or Mexico parallel the challenges commonly associated with globalization.

PNC’s George Hoffman spoke to Smart Business about how companies can manage cross-border payments and collections, local currency requirements and hedging options.

Why should U.S. companies consider tapping into the markets in Canada and Mexico?

For companies making their first foray into international markets, doing business with Canada is easy. Canadian business practices are very similar to those in the U.S. and there are no tariffs for NAFTA-produced goods and services.

The country’s large and diversified economy has had solid growth since the 1990s due to great natural resources and a skilled labor force, and it is one of the world’s top 10 trading nations, with the U.S. receiving nearly 80 percent of exports.

Mexico has the 12th largest GDP in the world and the highest gross national income per capita in purchasing power parity in Latin America. With an unprecedented macroeconomic stability, the country has reduced inflation and interest rates and has increased per capita income. Mexico’s proximity and our shared border give U.S. companies access to low-cost, quality manufacturing in addition to favorable NAFTA treatment.

What should U.S. companies know about managing payments and collections in Canada and Mexico?

Companies must have a solid understanding of local banking services and regulatory requirements. Similarities between the banking practices in Canada and in the U.S. make business transactions easier, and it is less complicated for U.S. companies to do business in Mexico since the 1994 peso devaluation.

However, there are still differences you need to be aware of that may impact your bottom line.

As with other international cash needs, managing business in Canada or Mexico is all about having the right amount of money, in the right currency, in the right place at the right time.

  • The right amount of money: Cash available to fund local payroll through Electronic Funds Transfer, the Canadian equivalent of ACH, or to pay a supplier in Monterrey.
  • In the right currency: U.S. dollar, Canadian dollar and Mexican peso.
  • In the right place: This could be a peso account held with a U.S. bank, a special cross-border account or an account held locally in Canada or Mexico. Lockbox services offer a collection address in Canada, which reduces the Canadian-U.S. mail/clearing float and allows for the outsourcing of receivables processing. This can be an added benefit when a company’s accounts receivable group is located in the U.S.
  • At the right time: It’s important to develop a hedging strategy to time-specific or anticipated cash flows in Canadian dollars or Mexican pesos.

Access to timely and accurate information is also imperative, whether it be through your bank Web portal, SWIFT (Society for Worldwide Interbank Financial Telecommunication) or a variety of other transmission options.

What are some of the risks to doing business in these markets?

Companies are managing cash more prudently as a result of the economic downturn, so there is a heightened sensitivity to the risks associated with the solvency of customers and suppliers. What this translates into is that companies are more actively collecting receivables, imposing stricter credit policies and looking closely at each country’s risk exposures and settlement practices.

It’s best to work with a bank that can help hedge your currency exposure and support your risk tolerance with the appropriate trade finance tools, such as letters of credit and documentary collections. With sound financial and legal guidance and the appropriate research and planning, the rewards of entering the Mexican and Canadian markets can outweigh the risks.

This article was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions, and does not purport to be comprehensive. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other adviser regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.

©2009 The PNC Financial Services Group Inc. All rights reserved.

GEORGE HOFFMAN is senior vice president, PNC Global Treasury Management. Reach him at george.hoffman@pnc.com or (412) 768-7910. To learn more about doing business in Canada and Mexico, check out PNC’s Advisory Series at pnc.com/joinus.