In Latin America, Colombia is a bright spot for innovation and growth within the small business ecosystem. An Oxford Business Group report on the nation pointed to an estimated 2.5 million small and medium-sized businesses (SMBs) in the country, while data released from Duke University in its CFO Global Business Outlook report found that Colombia’s economic outlook is relatively stronger than that of Latin America at large.
As Oxford Business Group noted, as in other economies around the globe, small businesses are the backbone of Colombia’s economy, accounting for more than 80 percent of all employment. But access to credit remains a top challenge for Colombian SMBs, a challenge compounded by a lack of financial inclusion.
“A big challenge for [SMBs] is accessing affordable credit,” said BBVA chief economist Juana Téllez in an interview with Oxford Business Group. “If entrepreneurs can’t get capital from a bank, they will look for other sources.”
Esteban Velasco, chief executive officer at Colombia-based alternative small business lender Sempli, reiterated this challenge in a recent interview with PYMNTS.
It’s not simply that a lack of access to bank loans adds pressure on growing small businesses in the market. Rather, explained Velasco, entrepreneurs face friction at every stage in the financing process.
“We have measured that six out of 10 small businesses that ask for a loan in a financial institution get rejected,” he said, “so most of them, if they want to grow, they have to take very expensive interest rates out there, from their families, from friends or even unknown people on the streets.”
These alternative sources of finance add complexity in more ways than one.
For instance, such informal lending means arbitrary interest rates and repayment agreements. Repaying a family loan won’t help a business owner bolster credit history with a formal lender, either.
At the same time, this informal finance remains a key component of a business’s overall credit profile, said Velasco.
“It is important to notice that almost 80 percent of the small businesses are family-owned businesses, and normally there is a link between the personal or the family equity with the company’s equity,” he said, adding that a small but significant portion of small businesses’ loan searches are motivated by a business owner’s need to exchange existing debt they have with their friends or family for formal debt.
Blurring the Debt Lines
One of the most common challenges in the small business lending space overall is a lack of credit profile, forcing lenders to turn to personal financial information to make a decision about whether or not to lend to a small business. Though this strategy has drawbacks, in a market like Colombia, where the lines are blurred between personal and business finances, such a strategy can be key.
Velasco said there are strong commonalities between the process of analyzing business-versus-personal finances.
“We have an analysis about their psychometric, their willingness to pay, their behavior on social media,” he said. “For us it is important not only to understand the company but also the people who are behind it.”
Similar analysis is done with venture capitalists, he pointed out, though FinTech today has allowed companies like Sempli to complete such analysis in less than an hour.
This strategy can also expand access to capital for small businesses with thin or no credit files. For traditional banks relying solely on business financials, even an SMB that is approved for a loan rarely receives all of what they need. Velasco pointed to hidden fees and high interest rates, while Sempli analysis suggests that many small firms obtain only about one-third or one-fourth of the total amount of financing they seek from a bank.
Mixing Tech With the Human Experience
Similar to the way that FinTech is able to mesh personal financial history with business financing, the digital lending market is also finding opportunity in the ability to mix technology and automation with a human touch — a combination especially important in a market like Colombia in which small businesses are so often entwined with families and personal lives of the people who run them.
However, like many other markets around the globe, Colombia’s economy is digitizing, and a younger generation of business owners is stepping in. Today’s entrepreneurs are “100 percent digital-oriented,” said Velasco, and reject requirements to spend hours on manual paperwork to apply for a loan.
With this in mind, Sempli has found a happy medium to address the needs of Colombian SMBs for both digitization as well as a human touch that supports their orientation toward family and friends. While the majority of underwriting stems from Sempli’s ability to obtain digital data on a company (via integration with various sources), a significant portion of the process “is more about the human touch we get from a digital or online video conference” with executives and business owners.
It’s a strategy that shows physical bank branches are not the only way to offer a personalized touch and expand access to banking services and capital for a country’s small business population. With an estimated four out of five Colombian SMBs calling it quits within their first five years of operation — a statistic that is not only damaging to that business owner, but to the economy as a whole — finding the happy medium between personalized interactions and digital automation is key to filling the SMB financing gap.