The crises of the past few months have exacerbated inequality in Latin America and done harm to people’s financial health. But entrepreneurs are stepping up with tech-driven solutions. This is the second in a series that will explore what’s coming next in financial health innovation in the region.
Julio César González, owner of the grocery store El Don in Mexico City, thought at the beginning of the coronavirus pandemic that his business would survive; after all, food is always a necessity. But as he told El País, his customers choose to buy from Costco and Walmart, or online. He ended up shutting down the store to save on electricity, and today needs a loan of $22,000 Mexican pesos (or $1,100 USD) to reopen.
But González has a problem: he doesn't have a credit history, so he can’t access a traditional bank loan. The business is too risky for traditional institutions to offer a loan with low interest rates. He’s been left with no other choice but to ask family for the money that he needs.
SMBs make up the backbone of Latin America’s economy – in Brazil alone, SMBs represent 98.5% of all firms, and employ more than half the country’s workers. These businesses have been hit hardest by the recent economic crisis. El Don is one in 2.6 million SMBs in Latin America that have already closed or are likely to do so due to the pandemic. It has become clear that any “economic recovery” will mostly benefit the biggest companies in the region, who have been able to access bank loans and pay consultants to plan out their cash flow for the year. Meanwhile, smaller competitors like El Don lack access to loans or financial tools.
Recently we shared the first blog post around our upcoming report, Tech and Financial Health in Latin America. In that post we looked at the challenges of getting a loan in the region, and the catch-22 for people and families who don’t have a track record with a bank: “You need credit history to get a credit card, but you also need a credit card to build your credit history”.
In this post we’ll look at a related topic: The challenges faced by SMBs’ owners (mostly families), and the growing wave of fintech startups that are democratizing access to capital and financial management tools for SMBs in the region.
The first challenge is around getting a loan. Brazilian SMBs’ interest rates, for example, can be three times higher than the ones set up for large companies, a huge difference that instantaneously draws barriers for them. But even when SMBs obtain capital, they don’t always have access to the necessary tools for managing their finances or acquiring expertise on how to save it so it lasts through the future. Most of the time, SMBs end up having highly unstructured financial data and have a hard time showing information that can validate them. Furthermore, in many parts of Latin America, small business owners don’t have the opportunity to use tools with accessible language that help them make financial decisions - one OECD report found out that less than half of the population is not familiar with the term “interest rates”.
A growing number of startups are helping SMBs owners get a loan. As we previously mentioned, interest rates are often extremely high for SMBs. Andrés Idarraga created Creci to try and change that. Andrés was born in Colombia to a mother who ran her own small business. He saw firsthand how hard it was to succeed.
Creci is a platform that mobilizes investment from social impact investors to lend to small businesses in Colombia that are pursuing at least one of the sustainable development goals. One of Creci’s clients is a young woman who set up a water treatment plant in a small town outside Medellin, Colombia. She was able to execute a government contract that she received, thanks to the money that Creci lent her to complete the plant’s construction.
Creci’s interest rates are competitive and they want to drive them even lower in order to “encourage small businesses to think about the impact they generate,” Andrés explained. Creci aims to “either be the first, or one of the only fintechs, that is able to capture impact statistics across its entire portfolio of lending.”
OmniBnk is another startup helping SMBs access working capital. “Banks simply do not know how to accurately calculate small business risk, especially in volatile economies... so they offer high-interest rates or pass on providing credit altogether,” said co-founder Andrés Abumohor.
OmniBnk (recently acquired by SoftBank-backed Greensill) uses a rapid and transparent risk analysis platform to provide lines of credit to businesses that otherwise would not have access to them and they have raised $3.5 million.
Lending is not the only area where startups are innovating. Other startups are helping SMBs owners manage their finances. Many SMBs have highly unstructured financial data, which makes it hard to convince an investor to provide a loan.
Philippe Besançon Varela, founder of startup CFORemoto, says that most small business owners are not set up for success. “Most are practically invisible for traditional sources of funding because they can not show financial data in a way that proves they are valid, and that their business is behaving properly. They’re doomed in some sense. If they don’t have financial control, then they can’t anticipate when they’ll break cash flow, and even if they can, they won’t be able to be funded.”
CFORemoto aims to solve this problem by offering small businesses in Chile clear insights into their finances so they can project cash flow, manage their finances, and apply for funding that may otherwise be inaccessible.
The success of small businesses is key to rebuilding the Latin American economy, and together we can increase the chances of their success by investing in and supporting alternative sources for funding SMBs and accessible financial management tools.