One of the key challenges faced by micro, small, and medium-sized enterprises (MSMEs) is access to finance. They’re outside of the realm of venture finance and often lack the collateral to access more traditional finance. A recent study from Cambridge Judge Business School suggests that fintechs are stepping into the breach.
The researchers dive into the Latin American market to understand how fintechs are helping provide access to funding for MSMEs. They gathered data from 540 small businesses that were collectively customers of 34 fintech platforms across Chile, Peru, Brazil, Colombia, Mexico, and Argentina.
Access to finance
The results show that 75% of the firms were defined as micro-enterprises, which underpins the theory that fintech firms can be crucial in providing access to smaller business funding. These businesses borrowed an average of just under $4,000.
The study also reveals that most businesses had attempted to raise money via more traditional means, whether banks, family, or friends, but their lack of success created a clear need for the fintechs to fulfill. What’s more, the entrepreneurs said that raising money via fintech platforms was also considerably faster than other methods, and also often came with better customer service.
“The findings of this study illustrate the potential of fintechs in narrowing the MSME funding gap and driving MSME growth across the LATAM region,” the researchers explain. “Especially for micro-enterprises, fintech credit is proving to deliver much-needed support for them to sustain, grow and expand.”
Boosting productivity
This finance appears to be a godsend, as after receiving it the businesses reported a boost to their productivity of nearly 50%. What’s more, many companies accessing finance this way also reported lower costs.
“Funds secured via fintechs enabled Latin American MSMEs to purchase assets and refinance or expand their business. More importantly, they enabled 92% of respondents to maintain or increase employees, 86% to maintain or increase income and 84% to maintain or increase turnover,” the researchers explain. “Thanks to the availability of credit, fintech-financed firms became more resilient, even in the face of the unprecedented trading conditions associated with the global pandemic. These results might be a call for action to our policymakers to help this industry grow.”
The researchers conclude by acknowledging the role both regulators and policymakers have played in the region in helping MSMEs access the finance they need and also in the development of the fintech industry. Without this support, the regulatory framework to underpin the industry wouldn’t have been possible.
