The final alternative consisted of establishing a finance company (financeira) in Brazil to assure consumer sales financing. There were four types of finance companies operating in Brazil: financeiras pertaining to financial conglomerates, financeiras related to industrial groups, financeiras linked to retail groups, and independent financeiras. All of them were subject to the same government regulations, which were fairly loose. They differed basically in terms of the market segment they attended. Funding was obtained through the issuance and sale of "letras de cambio" 1 in the money markets. However, contrary to the common practice, financing would have to be extended to consumers prior to the sale of the drafts in the market.
In a typical consumer sales financing transaction, the customer signs promissory notes and a credit contract with the finance company, which would pay cash directly to the seller. The finance company, then, would issue letras de cambio which would be sold to investors on the Brazilian money market, where such drafts were actively traded. Presently, six-month letras de cambio were being discounted at a rate equivalent to 295 percent per annum in Belo Horizonte.
Despite the minimum required investment of approximately U.S. $3 million in the proposed finance company, which would issue and guarantee the letras de cambio, it was felt that Morris might not be able to obtain the total amount of funds to attend its immediate working capital needs due to factors such as timing, and most important, legal constraints on the ratio "outstanding loans (and consequently, outstanding letras de cambio) to equity" of finance companies in Brazil. Since the company would exist on paper only, Albuquerque felt that the cost of running it would be minimal, apart from start-up legal expenses.
As usual, Morris de Minas would have to pay 13 percent p.a. to its U.S. parent for the investment in the finance company which would tie Morris (USA) funds. In addition, Morris de Minas would incur the cost related to the discounting of the letras de cambio. All these costs were assumed to be tax deductible, since the funds would be advanced to Brazilian corporations. As before, the remittance of interest on foreign loans would be subject to a withholding tax of 20 percent.
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