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Thesis
Although there is excess liquidity in global capital markets, most SMEs¹ in Latin America still struggle to access capital. The major pain points are:
- Only the largest businesses have direct access to capital markets, so most SMEs can only count on traditional banks for their capital needs;
- These companies pay more than twice the interest rates of large companies (at least 25%/year, and going as high as + 100%/year), although their default rate of 2% is as low as that of large companies.
There are several other bottlenecks in the market that directly affect SMEs. In particular, credit funds are costly to establish, forcing players who want to offer loans to either massify the business model or focus on deals large enough to justify the operational effort required to properly analyze the borrower and their assets.
In addition, raising capital for this purpose is also challenging and supply is limited. While global capital markets have excess liquidity and a lack of good investment opportunities, the allocation of this capital in Latin America is bureaucratic and non-transparent and has low-quality service providers (lawyers, auditors, accountants, custodians, administrators, securitization companies, credit operators).
Why is it opaque and bureaucratic?
When a company raises debt capital using traditional instruments — FIDCs or debentures—, investors have little control over how the funds are used or how the clauses work. They cannot monitor how their investment is performing, nor what the actual interest rates are on their investment.
In addition, a traditional capital market structure involves many intermediaries, making it difficult for both originators and investors to have a clear, standardized process.
How we managed to reduce costs
We have reduced the number of intermediaries, automated most of the processes, and even reduced the cost and time of operations.
We believe that once we scale and have access to different types of investors, we will definitely have more competition in terms of cost of capital.
How we can help SMEs access the capital market
In Brazil, to be profitable, a credit fund needs to be structured with more than USD 6MM because of the fixed costs and the number of parties that must be involved.
We automate almost all the steps to structure an operation in the capital market and charge a percentage of the operation, allowing smaller operations to be carried out.
Smaller transactions, on the other hand, usually do not attract much attention from investors who have little operational capacity to analyze, evaluate, track, monitor and invest in many operations at once. They opt for the largest ones.
We have developed our technology to automate various processes and embed business rules in code so that we can streamline the process and give investors more control over smaller operations. We can also bring together assets that belong to the same class so that Investors can invest in smaller operations (where they can typically get a better return) with little or no effort.
If investment capital were not so hard to raise and funds were not so expensive to set up, many players in Latin America could offer profitable, low-cost credit to their customer base.
¹ Small and medium enterprises
Last modified 2mo ago