LatAm SMBs: a 1 trillion financing gap

Latin American SMBs emerge as a focal point for lending fintechs in the forthcoming years, hungering to ride the wave of digitization while grappling with fulfilling their financial needs. In this arena, online lenders stand poised as a capital source for these ventures, although challenges remain and the financing void looms large -estimated at over $1 trillion across the entire region.

A recent report by Brazilian venture capital firm Atlantico reveals a stark reality. Banks and fintechs combined only address 13% of a potential demand estimated at $1.4 trillion. This leaves nearly nine out of every ten small and medium-sized enterprises in Latin America seeking credit without a viable option.

Traditional banks have historically shied away from extending capital to this segment, deeming it high-risk due to its prevalence in informal sectors. This poses challenges in accurately assessing creditworthiness. However, as Latin American economies undergo digital transformation and online payments gain momentum, some fintechs seize the opportunity to target this underserved segment.

The nature of SMBs in the region

The report highlights a concerning trend: Latin American SMBs trail behind their global counterparts in labour productivity. In countries like Brazil or Mexico, the value added per person employed is nearly half that of countries like the United Kingdom or Germany. Despite representing over 98% of all businesses in the region, Latin American SMBs contribute only 25% to the GDP, significantly lower than 44% in the United States.

Part of this may stem from a comparatively slower adoption of digitization. A Cisco SMB survey conducted a few years ago revealed that as many as 55% of respondents in Latin America expressed indifference towards digital technologies, with minimal efforts to pursue such strategies in the short term. In contrast, the corresponding figure in North America was 6%.

Certainly, SMBs face the challenge of inadequate access to capital, hindering their ability to accelerate this transition. The issue of credit scarcity in Latin America is not new. While there have been improvements, the pandemic dealt a devastating blow to many small-scale operations, leading to lenders shying away from the segment.

“The credit market for SMBs had been growing steadily up to 2019, but with COVID, everything changed,” said Rodrigo Cabernite, CEO of Gira+, a fintech that lends to SMBs in Brazil. Small businesses heavily leveraged cheap credit (due to low base rates in Brazil), and when interest rates rose, many went belly up, leading to defaults.”

Rodrigo Cabernite, Co-Founder at GYRA+.

Challenges in Fintechs lending to SMB in Latin America

As a result, he said, this led to available credit for SMBs practically drying up in recent years. But now, things could be gradually turning, especially as digitisation grows by leaps and bounds in countries like Brazil.

To be sure, lending to SMBs in Latin America does not come without a challenge. Cabernite argues that fintechs must be technologically savvy in identifying collateral, such as receivables. “There is uncertainty regarding default risk, with a historical lack of collateral available for loans,” he said.

Given credit recovery’s costly and sluggish nature, pursuing collateral identification becomes paramount, especially when dealing with smaller loan amounts. This strategy underscores the importance of lending to this segment effectively. Significant regulatory changes, particularly in Brazil, hold the potential to significantly enhance the SME lending landscape, particularly with the development of the credit card receivables market.

“This could unlock billions of USD in supply for businesses,” he told Fintech Nexus.

Companies such as Nubank, the region’s largest digital bank, have taken decisive steps into the sector as well. The Brazilian digital bank has made a case for lending to companies this year despite its core effort in individuals. The firm boasts over 90 million customers across the region, but has been meaning to grow significantly into the SMB sector as well to expand its revenue base.

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