Credix Insights: A closer look into the underlying assets of FinTech debt facilities
FinTech in LatAm is here to stay. In the last Credix Insights article, “The Fintech Revolution in Latin America”, we saw that the number of active FinTechs in LatAm have grown at an annual rate of over 45% between 2017 and 2021, when it reached the hallmark of 2,500 companies. In that blog, we also introduced the concept of non-bank loan originators, or credit FinTechs: startups that are intrinsically different from banks when it comes to capital formation, reserve requirements, or even licenses, and originate loans with capital that is generally raised from the debt capital markets, predominantly through an off-balance sheet structure. It turns out, however, that credit FinTechs are not all the same, and each tries to find their niche by focusing on specific asset classes within the credit spectrum.
Before we dive in, let’s refresh. What exactly is an asset class? The answer depends on the context. When discussing the capital allocations of an investment portfolio, one could think of asset classes as fixed income, equities, real estate, crypto, and so forth. If we look at fixed income a bit closer, for example, it could be further divided into more specific asset classes, such as sovereign bonds, corporate bonds and asset-backed securities (ABS). Zooming in even more within the ABS space, there can be a diverse pool of assets, including auto loans, credit card receivables, and many others, that can ultimately be seen as asset classes. When a credit FinTech accesses the debt capital markets to raise funds through an off-balance sheet vehicle, it is, essentially, generating an asset-backed security. This ABS is formed by pooling the loans originated by the FinTech, in a process called securitization, and creating a financial instrument backed by cash flow from this pool of loans that will be acquired by investors.
Now back to the gist of the article. In Latin America, there are credit FinTechs focused on originating different types of assets. Those asset classes differ themselves mainly in 3 attributes: (i) debtor profile, (ii) cash flow structure, and (iii) collateral characteristics. Starting with the first, debtors could be classified, in a simplified way, as individuals or companies. The second makes reference to the way a particular asset is repaid. For example, in an invoice advancing operation, the securitized asset is normally fully repaid only at the maturity of the invoice, while a car loan is usually repaid via fixed monthly installments. The last attribute is related to the type and level of collateral that is backing the ABS. It could be either non-collateralized, collateralized, or over-collateralized, by a myriad of different instruments like financial investments and hard assets. Customarily, in capital markets transactions, collateral characteristics tend to be consistent or similar within securitized pools.
In a nutshell, a list of common asset classes operated by credit FinTechs would include consumer loans, SME working capital loans, factoring or invoice financing, car loans, student loans/tuition receivables, home equity, import/export trade financing, agro loans, payroll-deductible loans, and revenue-based financing. Below, we’ll dive deeper into some of them.
Factoring, also known as invoice financing, is a financial transaction in which a business sells its accounts receivable (unpaid invoices) to a third-party entity called a factor. The factor purchases the invoices at a discounted rate, providing immediate cash flow to the business that originally issued the invoices. Factoring enables businesses to convert their accounts receivable into immediate working capital, bypassing the typical wait time for customers to pay their invoices. Factoring is a popular credit product in Latin America, mainly because it is an alternative to bank financing. In some cases, businesses in Latin America may face challenges in securing bank financing due to factors such as limited credit history, lack of collateral, or too high-interest rates. Factoring offers an alternative financing solution by leveraging the value of accounts receivable, rather than relying solely on the business's creditworthiness. This allows businesses to access working capital based on the creditworthiness of their customers, making factoring a viable option for companies with limited access to traditional bank loans.
Credmei, part of the Credix ecosystem, is a great example of a factoring-focused FinTech. Targeting SMEs with yearly revenue between 1 and 30 million USD in Brazil, Credmei has always focused on using technology and data to deliver a first-class factoring product to its clients. Over the last 10 years, they operated +95 million USD in short-term invoices, which, due to Credmei’s very efficient and thought-through loan underwriting process, resulted in an impressive 0.03% overall historical portfolio loss.
Car financing, on the other hand, refers to the process of funding the acquisition of a vehicle through a loan or lease arrangement. It allows individuals or businesses to acquire a car by spreading out the cost over a period of time instead of paying the full purchase price upfront. Car financing is a very common practice in Latin America, as the second-hand vehicle market is customarily tight. This means that cars tend to retain relatively good resale value, which, combined with the cultural desire for asset ownership, motivates individuals to opt for car financing. Reflecting that, according to a study published in 2022 by PricewaterhouseCoopers, car financing accounted for 27% of the loans originated by Brazilian credit FinTechs to businesses in the country.
Atria, a Mexican credit FinTech, on its turn is an example of a car financing company in the Credix ecosystem. Atria focuses on offering auto loans to finance the acquisition of used cars from authorized car dealers. By using a B2B distribution model, Atria enables specialized second-hand vehicle dealerships to enhance their businesses by offering new payment options to their end-customers. Atria was founded by the experienced team that established and managed the car financing arm of Crédito Real Autos, one of Mexico’s biggest non-bank lenders, where, from 2017 to 2021, they were able to grow the loan portfolio from USD 3.5m to almost USD 60m. Now, they are replicating the same business model with Atria, with ambitious plans of becoming one of Mexico’s biggest car financing originators.
Lastly, Revenue-based financing (RBF), also known as revenue-based lending or revenue sharing, is an alternative form of financing for businesses. Unlike traditional debt financing, where businesses borrow a fixed amount of money and repay it with interest, RBF provides funding in exchange for a percentage of the business’s future revenue. In an RBF arrangement, a funding provider (often called an investor or a funder) provides capital to a business in return for a share of its ongoing revenue. The terms of the agreement typically include a repayment cap or multiple of the original investment, which defines the total amount the business will repay. This repayment cap ensures that the investor will eventually receive a predetermined return on their investment.
Within Credix, Divibank is a FinTech specialized in RBF. Their main value proposition relies on providing non-dilutive capital to SMEs in Brazil. Founded by a highly-experienced team of ex-bankers and technology experts, Divibank is backed by renowned VCs, such as Better Tomorrow Ventures, ClockTower Ventures and MAYA Capital. In addition to their equity raising, Divibank used the Credix platform to structure a debt facility of USD 5.5 million. The facility went live in August 2022, with the participation of a syndicated pool of investors.
The diversity of asset classes managed by FinTechs in Latin America, including factoring, car financing, and revenue-based financing, demonstrates the robustness of this innovative sector. With time, high-quality FinTechs will adapt to changes in market dynamics and regulatory developments, consolidating themselves as a differentiated and efficient capital source alternative for LATAM individuals and businesses looking for debt funding solutions.
About Credix
Credix is a global portal that connects institutional investors with high-quality credit deals in Latin America. Its proprietary technology empowers the tokenization and securitization of debt facilities, creating programmable assets and automating capital markets workflows. Credix is moving the $800 billion private credit market into the digital era.
The company was founded in 2021 with the vision of changing how the global debt capital markets work today. Credix is backed, among others, by Motive Partners, ParaFi, Valor Capital, Victory Park Capital, MGG Investment Group, Circle Ventures, and DRW Cumberland.
