Providing Financial Solutions where Banks CannotBy Jan Hogewoning | Mon, 09/21/2020 - 09:51
Q: How has the COVID-19 economic fallout impacted demand for Pretmex and Lendera’s solutions?
A: Only 30 percent of Mexican SMEs have access to financing. Companies cannot grow without it, especially during a crisis like this. At Pretmex, as expected, we have observed an increase in demand for financial solutions from small businesses. Many of them lack liquidity and they still risk closure if they do not find new income channels. Credit has become a fundamental tool to survive what is, after all, a temporary crisis. At the same time, for some, this crisis is generating new opportunities in the market. There are attractive discounts in primary material and equipment. Those companies that are prepared and have the muscle can buy up their competition.
At Pretmex, we did not stop tending to clients and have in fact increased the number of financial solutions we provide. The key to success for a financial solution, especially now, is to provide personalized products and to stay very close to the client. Traditional financial institutions tend to provide mass solutions. But the needs of one business are very different from those of another. One of the benefits of providing financial solutions to SMEs is that they are more flexible when it comes to organizational change than large transnationals. Many of our solutions assess specifically how COVID-19 has affected our clients and what measures these companies are taking to confront the contingency. For example, in the case of restaurants, many are awaiting the green light to reopen their dining areas. Meanwhile, they have had to diversify their sources of income. Some have converted to online cooking schools or dedicated themselves completely to home deliveries. For the latter, a restaurant would need financing to acquire vehicles and a team of delivery people. Maybe they need capital to adapt their kitchen to comply with sanitary regulations. There are also restaurants that simply need liquidity to stay put for four months and be ready to reopen when the moment comes. In the latter case, we would be looking at restructuring their payments and debts. At Pretmex, we offer a variety of credit types but also consider financial advice as a key part of our service.
Q: What criteria do you set for credit applicants and what are the challenges with small businesses?
A: We have clients in a wide variety of sectors: restaurants, gyms, manufacturers, transport companies and service companies. However, they must have more than five employees and they need to be a legally registered entity. We do not work with the informal sector. Also, 80 to 90 percent of financing is directly aimed at the core activity of the company. Since we are 100 percent digital, we have a national reach. The process starts with the application, followed by a thorough review of the client’s affairs, the signing of a contract and the implementation of guarantees. While reviewing the client’s status, we connect with SAT and other sources of information and use an algorithm to understand their situation.
We have express solutions that can clear a loan request within 72 hours. The maximum wait time is 15 days. The loans range between MX$100,000 (US$4,600) and MX$30 million (US$1.38 million) and the time for approval will be longer for a larger loan. The rate of successful applications from SMEs is approximately 45 percent. If you compare this to a rate of 10-15 percent at traditional banks or 2 percent at collective funds, we have a very high approval rate. We try to make the rates competitive and accessible for SMEs.
Q: Why do SMEs not get their loans from larger financial institutions?
A: During these times of crisis, traditional banks take a conservative approach to lending. The simple fact is that they are spending people’s savings. Their priority is to take care of these savings and survive. They reduce the loan size to small businesses and focus instead on the safest economic segments. For big financial institutions, large, multinational companies are considered much less risky than SMEs.
Before the COVID-19 contingency, banks were already actively restricting credits to ensure that their portfolio did not deteriorate, much to the detriment of small businesses looking for loans. Banks, because of their size, have never managed to understand and connect with SMEs. Also, there are simply very few banks, with only 51 in Mexico. Five of these manage 90 percent of the total assets. A bank that offers MX$100 million (US$4.63 million) in credit to a transnational company is not going to turn to small businesses looking for a MX$1 million (US$46,300) loan. The cost of administering either is the same, however.
Banks are also bound by very demanding regulations. We have to remember that a large public corporation will have a more transparent picture of its financial affairs. It will be audited in a variety of ways. Many small businesses, particularly family businesses, are less transparent with regard to their fiscal affairs and cash flow. Nonbank financial entities are bound by fewer rules. Yes, they are bound to anti-money laundering laws but they are more flexible in providing services. They tend to be fully digital, whereas traditional banks have an infrastructure of physical branches where customers still need to go to complete certain procedures.
Q: You also co-lead Lendera. What does this company offer to SMEs?
A: Lendera is a crowdfunding platform that allows investors to buy equipment and then lease it to SMEs. The latter come to the platform with an idea of what type of equipment they need. If we approve their request, we will publish the financing option for that equipment on the platform, along with an analysis of the company. Then investors can choose to invest in that product. Another option is when the small company has equipment that is currently not in use; they can choose to sell and then lease back.
We have a community of almost 8,000 investors, which includes investor institutions such as SOFOMES. The platform does not make a profit from the payment of the equipment, all of it goes to the investors, which provides them higher returns. The advantage for investors is that they can place their money in different areas, lowering their investment risk. In addition, many investors also develop a closer relationship with the businesses that rent the equipment. Lendera is a platform that allows far more Mexicans to invest, without the cost of financial institutions acting as intermediaries. There are few very large investors in Mexico so these platforms are definitely important.
Q: How fast has Lendera grown over the last few years?
A: Lendera started three years ago and has since grown over 40 percent a year in number of investors. So far, 103 projects have been published on the platform, which have benefited 80 small businesses. In total, equipment investments represent nearly MX$85 million (US$3.94 million) in different industries. Meanwhile, investors have received returns totaling MX$8 million (US$371,000). Throughout these three years, even during the COVID-19 contingency, we have had overdue credit situations in just 1.5 percent of cases.
Q: Lendera is currently in the process of applying for recognition as a financial institution by CNBV. When do you expect this process to be complete?
A: COVID-19 has affected deadlines, delaying the process by about three months. There are about 80 fintech companies applying for authorization from CNBV and 25 of these are collective funding platforms like Lendera. We expect to receive our recognition by December 2020 or January 2021. This will bring a great deal of certainty to the industry. It will attract more investors domestically and abroad, giving small companies greater access to financing.
Pretmex specializes in providing financial solutions to Mexican SMEs. It provides loans, as well as financial advice. Lendera is the world’s first crowd-leasing platform. It allows investors to buy equipment and then lease it to SMEs