Technology keeps small businesses well-stocked and growing in Latin America
Innovation in MSME lending: Latin America
Latin America’s medium, small, and micro enterprises (MSMEs) are as diverse and dynamic as the region itself, but one thing that too many of them have in common is a lack of access to capital. The finance gap for small and medium businesses is estimated by the Inter-American Development Bank (IDB) to be about $250 billion — a figure roughly equivalent to Chile’s entire economy. Our recent publication, Bridging the Small Business Credit Gap Through Innovative Lending, features examples of the funding challenges and solutions for small businesses in this region and around the globe.
As in many parts of the world, new approaches to MSME finance are emerging in Latin America. Accion Venture Lab works with two innovative fintech companies focused on improving and expanding MSME lending in Latin America: Tienda Pago, which operates in Mexico and Peru; and Konfío, based in Mexico.
To help small stores, or “tiendas,” finance their inventory, Tienda Pago uses a mobile-based approach and works with partner distributors to extend short-term working capital credit lines. Small businesses in Peru and Mexico often struggle to find enough funding just to keep their shelves adequately stocked, let alone grow their sales.
“We can see that the stores we’re financing … have more variety of products, more stocks, and they’re doing better overall,” says Tienda Pago’s CEO Dan Cohen. With Tienda Pago, small store owners can immediately fund inventory purchases. The fintech firm leverages its supply chain relationships with large consumer packaged goods distributors that the stores are already working with to lower its customer acquisition cost and improve risk management. The distributors that work with Tienda Pago enjoy increased inventory sales, as well as lower collection costs and security risks through reduced cash handling.
Based on the data collected from distributors, Tienda Pago determines credit worthiness for each store, which establishes their weekly credit need and capacity. Stores and distributors access the Tienda Pago solutions via text messages, enabling distributors to request direct electronic money transfers from Tienda Pago in exchange for inventory deliveries. Distributors are relieved of the burden of cash collection and reconciliation of invoices, as Tienda Pago pays distributors directly for inventory purchases delivered to their customers.
Another company revolutionizing small business funding in the region is Konfío, an online lender that provides affordable working capital loans in Mexico. Konfío’s entirely digital platform allows for low-cost customer acquisition and faster credit assessments that leverage alternative data, enabling Konfío to offer lower rates and faster turnaround time when compared to traditional brick-and-mortar lenders.
The online platform is designed to be convenient: it takes about 10 minutes to fill out a loan application, and the applicant receives an immediate response. Konfío’s target customers are micro and small businesses (MSMEs), which often lack established credit histories. These businesses are frequently operated by younger entrepreneurs — typically 25–40 years old — who come from a relatively low-income segment of the population.
To figure out whether prospective borrowers are likely to repay a loan, Konfío’s proprietary algorithm incorporates more than 5,000 data points into a single predictive measure. It draws on both traditional sources of data — financial transaction records, borrowing history — and more innovative sources, such as demographics, educational background, signs gleaned from social networks about spending and behavior, and “psychometric” analysis of personality traits, abilities, and knowledge.
This article is part of our global series on MSMEs in seven key countries or regions where we work. Read the paper Bridging the Small Business Credit Gap Through Innovative Lending or check out the series.