Digital lending startups set to get cheaper, easier funding as investors look at new asset classes
Latin American fintech lenders are finding their borrowing options broadening as global investors increasingly look to debt financing opportunities.
Even Brazilian digital lenders, which have access to a liquid capital market locally, are finding investors more interested than ever in debt financing.
The trend is a welcome one for the region’s credit startups, allowing them to finance growing loan books at better rates.
“I wouldn’t say debt financing is an option, it’s more of an obligation,” says Francisco Ferreira, a founding partner at Brazilian digital lender BizCapital “To grow you need financing beyond equity.”
For many credit startups, getting capital to lend out is difficult and expensive – especially compared to banks that get deposits at cheap rates and can borrow on wholesale capital markets.
That is now set to change.
International investors are setting up new funds to lend to startups – to date, most investment in Latin American startups has been by way of equity. Global banks are showing interest in the area. And, for Brazilians, historically low interest rates have driven a rush of cash into digital lenders.
“This is a market that has enormous growth potential,” says Glenn Goldman, an advisor to several fintech companies.
Global investment interest grows
International investors are showing growing interest in lending to Latin American fintech startups.
The Inter American Development Bank is preparing to set up a “venture debt” fund to lend to startups in Latin America and the Caribbean. The fund is looking for a manager, and aims to provide “smart financing” for 20-30 startups that doesn’t dilute the founders’ stakes.
Additionally, at least one private-sector debt fund for Latin American fintechs is understood to be setting up.
Banks are also getting into the game. Mexican digital lender Credijusto agreed a $100 million line of credit with Goldman Sachs (pictured) last month.
The loan, denominated in Mexican pesos, is a landmark in its size and highlights a trend of growing global interest in Latin American fintech.
While the cost of the facility is “competitive”, the scale was particularly compelling for Credijusto, says David Poritz, co-CEO.
“There aren’t groups or credit funds in Mexico that would be able to extend anything close to that… Right now one of the only solutions is leveraging international groups. ”
Credijusto offers real-estate backed loans and equipment leases, and the average term of its loan portfolio is 40 months.
The company has borrowed from global investors in the past. This deal is its largest, and “coincided with good market conditions,” said Poritz, as international investors, both in equity and debt, look more closely at fintech in Latin America and the Caribbean.
“Major institutional investors who have perhaps traditionally not focused a tremendous amount of their time and energy in Mexico and the region are really starting to reevaluate that.”
Nonetheless, for Credijusto, the loan is another step towards an end-goal of capital markets financing.
“We see doing a public securitization very much on the horizon in the near term. We’d like to be the first [fintech] group that does a public securitization in our region.”
That follows the same funding blueprint as many global fintech lenders. At the outset, they focus on simply getting access to financing, says Glenn Goldman. Then they move to seeking more flexible borrowing, before searching for more cost-effective options and, finally, diversifying their funding sources through securitizations or whole loan sales.
“That’s the kind of evolution we’ve seen in developed markets, and I think we’ll see the same pattern in Latin America.”
Capital markets and securitization
Brazil might be an outlier to that pattern. Funding in capital markets is easier for Brazilian digital lenders than for their counterparts in the rest of the region, thanks to an active local capital market. And it has become cheaper in recent years.
“The base rate in Brazil is at it’s lowest ever, at 6.5% per year,” says BizCapital’s Ferreira. “Globally rates are also low and investors are looking for higher yields.”
As Brazilian interest rates have fallen from around 13% just a couple of years ago, investors have rushed to allocate money to hedge funds which in turn have looked at new asset classes like digital lending portfolios.
“From our perspective, we have received a lot of attention from investors,” says Ferreira.
BizCapital, which lends to small business that have revenues of up to $2 million, uses a FIDC structure to finance much of its lending. Under that model, asset managers invest in the FIDC which, in turn, buys loans from BizCapital. The FIDC pays BizCapital for originating and servicing the loan, while investors in the fund earn interest from the loans.
The company’s loans have an average term of 11.2 months, although Ferreira says that is likely to increase this year to 15 months.
Brazilian lenders can also finance with securitizadora entities, and through debenture sales in the local market. These structures have become so popular that a new company, Vert, now offers Securitizadora as a Service.
Still, Ferreira says international investors will be important once BizCapital and its peers look to larger-scale funding – in the hundreds of millions of dollars. And he is quick to emphasize that funding still takes effort.
“Brazil has a unique market for financing deals. I wouldn’t say [FIDC financing] is easy – but it is common.”
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