According to a recent survey by the Institute for Applied Economic Research (Ipea), in Brazil, 41 percent of entrepreneurs fail to have access to financing through banks. Over half (59 percent) of Brazilian companies have access to loans at banks, but this number is not good news. In developed countries, the average percentage is 95 percent.
For small and medium-sized companies, getting loans is even harder. According to the Brazilian Service of Support for Micro and Small Enterprises (Sebrae), 84 percent of smaller businesses do not have access to financing lines, which are mainly given to big enterprises. Besides that, high interest rates and bureaucracy keep the smaller players away from the financial products offered by banks.
Also, these individuals might not have formal documents to back up their activity – such as financial statements or even bank accounts. Therefore, traditional banks are less likely to take their chances and offer the small entrepreneurs a loan.
Brazilian fintechs have realized that this gap is an opportunity to increase their revenue, so they have created products aimed at those businesses. According to Jorge Vargas Neto, co-founder and director of the Brazilian Digital Credit Association, big banks have no motivation to tap into this potential market. Their priority, he says, is serving customers who generate more resources.
Informal economy is a hurdle for banks
Another impediment comes from the lack of formalization some entrepreneurs have. Those small and medium-sized ventures have a very thin paper trail and this bars them from filling the requirements for traditional loans. Also, often, they do not have a proper financial education, says Mr. Vargas Neto. “This makes it difficult for traditional banks to give credit to these institutions,” he says. Big banks tend to avoid smaller clients completely; even when they do have something to offer, it is too expensive for small and medium companies.
According to Mr. Vargas Neto, Brazilian fintechs are able to offer services to this segment as they are more flexible. Their main environment is online and they are able to process other, non-traditional data: social networks, online behavior, even an eBay account. “The more information you have, the better you can understand the customer and offer a suitable product,” Mr. Vargas Neto says. A fintech, because it is fully digital, has smaller costs and is less bureaucratic, offering products which are an average of 30 to 40 percent cheaper, he says.
TrustHub, for instance, offers services to companies with annual revenues between BRL 100 thousand and BRL 30 million. Since November 2017, when it was created, the fintech provided BRL 20 million in credit and it averages 45 operations per day. Waiting times for clients requesting a loan can be of up to one month in regular banks, versus one day when dealing with a fintech.
This higher level of customization makes it possible to offer customized credit. “If you give more credit than the entrepreneur needs or give it at a very high rate, you may be handing out a death sentence to that business,” believes Mr. Vargas Neto. Sometimes, he believes, the best help is to not give credit, especially in a country with more than 60 million people in debt.
Offering credit for these individuals can have positive effects not only for Brazilian fintechs but for the country’s economy as a whole. In the country, 72 percent of jobs are in small and medium-sized enterprises, therefore, they play a key role in the economy as a whole. At the same time, the “mortality rate” of the small businesses is very high: almost half of them close after only two years of existence.