The cost of doing business in Ecuador: What most expats don’t know
By Lee Dubs
A decade ago it was not common to encounter businesses in Ecuador that were owned and operated by North American immigrants. I knew of just three in Cuenca, including our own bookstore. As the rapid immigration from North America expanded from its 2008 beginnings, more and more newcomers opened businesses, especially in the restaurant field.
What most immigrants do not fully comprehend is the high cost of doing business in Ecuador. They think that because the cost of living in Ecuador is lower than in their home country that must mean everything is cheaper. Some even expect expat-operated businesses to offer them lower prices as a favor to fellow countrymen. They fail to understand why they cannot buy a bowl of chili or a used book for a “bargain price” from their paisanos.
The only ways for business owners to offer such bargain prices and stay in business would be to substantially reduce the quality of goods and service and also avoid paying the required federal and local fees. Immigrants operating a business who cut costs by dodging legally required expenses fail to contribute equitably to the overall economy. This also subjects them to severe financial penalties, closure, and even revocation of their visas and deportation. It has happened.
As a favor to the uninformed, I offer to immigrant residents an explanation of the cost of doing business in Ecuador. This will also serve as information to those who are considering opening a business enterprise in Ecuador. Finally, it is a warning to those who might think they can skirt the laws and never get caught.
Rent. Unlike many Ecuadorians whose businesses are located where they already own the building, immigrants usually rent their place of business. Depending on size and location, rents vary from several hundred dollars to over $1,000 a month. Building owners regularly raise rents every two years.
Employees. For many years local employees suffered abuse from employers and were often underpaid and under protected. Employment laws have changed so much to protect employees that even firing an employee with cause requires the employer to pay several months of salary. In addition to a national minimum monthly wage, employers must pay extra wages on weekends, Social Security, two extra months of pay each year in August and December, and allow paid vacations. As if all that were not enough, every April employers are required to pay their employees Utilidades, which is the equivalent of 15% of their profit from the previous year. All of the above can easily add up to several thousand dollars a year for each employee. (For more about Ecuador’s labor laws, click here.)
Utilities. Do you enjoy free wi-fi in a business location? It’s not free for the owner. Did you know that utility rates are much higher for businesses than for residences and that they increased substantially in 2015? A good example of this is that restaurants, if they operate legally, pay five to six times the residential rate for LP gas. We pay a lot more for utilities at our businesses than we do at home.
Accountant. Having an Ecuadorian accountant is a must. Their fees start at around $100 per month and depend on the size and complexity of the business. Without an accountant to keep up with frequent changes in regulations and to assure that everything is paid correctly and on time, you risk heavy fines and being shut down for a week or permanently. One gringo business owner did not know of a new regulation regarding extra pay for employees, and he was fined $2,400 for a single slip-up. He paid the employees but still had to pay the fine.
Taxes. Immigrants know about the national 12% I.V.A. (value added tax) on most goods and services, which is passed along to customers. However, business owners also must pay income tax to the S.R.I. office here as well as to their country of citizenship abroad.
Permits. The R.U.C. business license has no cost, but every other one of some half dozen required permits does; and random checks are made on businesses. Even the fire department charges for a permit to operate, also making sure you have a fire extinguisher handy.
Product. Businesses that offer a product, not just a service, must acquire that product. Whether it is purchased locally or shipped from another country, there are significant costs involved, which might include import fees. Buying and shipping one box of forty-five to fifty used paperback books from the U.S., for example, costs us about $240 to $250.
Operational costs. Consider what else is in or on a restaurant or shop besides what is sold. Tables, chairs, a desk, counters, kitchen equipment, appliances, bookshelves, computers, fire extinguishers, decorations, signs, and more. Each had to be bought and, in many cases, requires maintenance. Light fixtures (not just bulbs) burn out, refrigerators need repair, furniture needs replacing, etc. Building owners generally take responsibility for the outside of the building, but the renter usually has to pay for all inside repairs and modifications. In our bookstore, for example, we remodeled the sink and bathroom area and had to absorb the entire cost because it was inside the building.
Advertising. Whether online or through professionally printed magazines and brochures, advertising costs money. Costs may range between $100 and $300 a month just to print and distribute brochures, for example.
Inflation. Some of us manage to keep our prices the same and absorb rising costs, while others cannot. Most of our book prices are the same as they were when we opened in 2005, but we sell more books now and offer a liberal trade policy. While inflation in Ecuador is not terribly high, over the years increasing costs add up; and most shop owners must raise their prices to make even a small profit.
So, the next time you visit a restaurant or store operated by fellow immigrants, look around and appreciate how much the owners have to spend just to be in business, especially if they are providing employment for Ecuadorians. Also excuse the ignorance of those who say, “I can’t believe they are ripping off their fellow Americans like that.” If it were cheap and easy to run such an enterprise, we probably would see more of them.
Lee Dubs is a retired U.S. language professor and is owner, with his wife Carol, of Carolina Bookstore. He first visited Cuenca in the 1960s when he was a Peace Corps volunteer in Peru.