Closing Latin America’s $350B SMB Trade-Finance Gap
The cash flow challenges for small businesses have been in place for a while, in Latin America since well before the pandemic took root.
“In Latin America, the infrastructure mainly relies on banks to provide kind of these types of services to the SME segment. They’re not equipped to manage the operational risks associated with these smaller businesses,” Shoihet told PYMNTS, especially when it comes to extending short duration credit lines, debt products or factoring.
Overall, Marco Financial has noted, banks reject 50 percent of small- to medium-sized business (SMB) financing applicants.
Banks, he said, are focused on firms that, at a minimum, usually see $12 million in export volume — and above. Many of these mid-cap level enterprises have already had strong relationships with banks and lenders. But, as Shoihet said, these firms account for roughly 50 percent of trade volume in the LATAM region.
The other 50 percent, he said, comes from the SMBs that are being overlooked by the traditional financial services community, he told PYMNTS — and who create a majority of jobs in the region.
Many of the firms looking for trade finance may be shipping on a weekly, biweekly or monthly basis — and the underwriting process, which can take 30 to 60 days, may not offer the cash these smaller firms need to grow or lock up supply chain contracts.
During the pandemic, said Shoihet, banks are already grappling with legacy credit infrastructure, and overworked underwriting teams doing their jobs from home with limited bandwidth.
SMBs may be further hamstrung by traditional lending activities, said Shoihet, as borrowers are typically required to have an operational track record spanning at least a few years, and provide evidence of reasonably healthy balance sheets.
In general, he noted, export financing is viewed as a relatively risky endeavor, as lenders are essentially advancing cash on purchase orders before goods are produced or sent.
“It’s very difficult for a bank to justify [accounts receivable] AR financing that effectively puts capital at risk,” he said. For those financial institutions (FIs), he said, the mindset is: the juice is not worth the squeeze.
The result is a trade finance gap worth about $350 billion within Latin America and more than $1.5 trillion globally, according to Shoihet. Online platforms, such as Marco’s, can craft data-intensive risk models that will consider industry vertical information, operational data and regional trends to decide whether or not to pre-qualify financing opportunities.
In terms of mechanics, he told PYMNTS the company provides SMBs advances on their accounts receivable from US-based creditworthy investors. Marco Financial said earlier this month that it had received $26 million in funding and credit from a consortium of investors.
“We’re not underwriting specific invoices, we are not spot factoring — we’re actually underwriting the seller/buyer relationship,” he said. The platform model offers a process that is a streamlined one compared to the banks. Funding decisions, he said, are also typically rendered in a matter of days, with funds advanced within 24 hours of approval.
Drilling down into the process, he offered the illustration of a smaller exporter — in this case, fruit — whose end customers might be some of the larger superstore retailers in the United States. Marco would examine the LATAM exporter’s standard bank and accounting information and also looking at how that firm’s accounts receivables and payables have aged, how shipments have trended and to see how relationships with other debtors have progressed.
“Ideally, we’d want to be a financing partner for every buyer relationship that they have in the United States,” Shoihet said. When goods arrive at the port of arrival, he said, typically Marco will advance up to 90 percent of the gross invoice value. Depending on the terms, Marco would then collect directly from the U.S. retailer’s account, and then pay the exporting SMB the remaining 10 percent to 20 percent of the invoice (less a fee).
With a nod to the scalability of online platforms, Shoihet said that Marco would look to expand horizontally to forge sticky relationships with its target audience of exporters. That roadmap might include other supply chain financing solutions (one area, he said, might include pre-shipment financing). The company is also evaluating secured credit card concepts, too, as an adjacent ancillary offering.