WHY WE INVESTED
Finkargo is building a new asset class to help meet LatAm’s $350 billion trade financing gap
For years, Marisol Ramirez Velasquez, CEO of ZMR Colombia, had been struggling to grow her merchandise and electronics import and distribution business, which launched in 2017. Like many SME importers across Latin America, ZMR’s cash flow was often locked up in its freight cargo, making it challenging to run, let alone grow the business. But in May 2021, after ZMR secured trade financing through the new digital platform Finkargo, the company was able to grow like never before. Four months later, ZMR finally reached its goal of opening a licensing division and since then, Velasquez has secured licensing agreements with Universal to use Hello Kitty, Minions, and Jurassic Park characters on electronics and kitchen supplies, a move that has helped dramatically expand the business. “Companies like us suffer a lot with cash flow,” says Velasquez. “When you try to find support from a bank, it’s really hard. Finkargo is really pointing to the future in financial services.”
ZMR is hardly alone in its challenges of securing import financing in the region. While Latin America produces many commodities including agriculture, mining, and oil, it lags in production of manufactured or technology intensive goods, relying on imports of key raw materials, intermediate goods, and sometimes finished products of electronics, machinery, medical equipment and pharmaceuticals, among others. While SMEs make up about 40 percent of the region’s $1 trillion in annual imports, 80 percent of them have no access to working capital.
Banks and traditional players in the space tend to focus on exporters; the import finance market has historically ignored SMEs, whose assets are typically tied up in inventory in-transit. Across Latin America, this lack of working capital liquidity has led to an estimated $350 billion trade finance gap that SME importers have been forced to shoulder, making it nearly impossible for them to grow their businesses. It’s this conundrum—faced by so many SME importers — that convinced Finkargo co-founders Santiago Molina, Tomas Shuk, and Andres Ferrer to launch Latin America’s first specialized SME import finance platform in May 2021, with ZMR as one of its first users.
The challenge faced by LatAm SME importers
It’s easy to blame banks for this lack of financing, but the reality is that banks don’t have the capacity to understand the complex world of international trade and logistics and serve the SME market’s needs in the region, says Molina. SME importers’ money is wrapped up in their inventory, which banks have no way of assessing or tracking. Unless an SME has real estate or other collateral that banks know how to work with, they simply can’t get the financing needed.
What’s more, SMEs are often family businesses whose finances are mixed with family expenses and many of them work on cash which limits transparency and the amount of information they can disclose to lenders. Given that so many of these SMEs have informal practices, banks simply do not have the information or ability to dig deeper and understand the financial reality of these businesses. “Banks are caught in a cage where they can’t do much to offer these institutions financing,” says Molina. “That’s why we have this rise in fintech across Latin America. Fintechs have to go the extra mile to understand the SMEs.”
Creating a new asset class for import financing
Finkargo gets around this challenge by financing the inventory in transit, giving importers more negotiating power with their suppliers. For example, for an SME importing one $30,000 container a month, that would normally mean waiting up to 60 days before it’s ready to ship, 45 more days for transit, another 30 days to sell it, and an additional 30 days to collect payment, resulting in 165 days—or five and a half months—in which the cash for a single month’s inventory is not accessible. Finkargo is able to finance up to 70% of the cost of a container, enabling that same SME to go from buying one to two containers a month, to doubling the size of the company. “We give that SME negotiating power with their supplier,” says Molina. “They know they have the financing available, not only to buy more merchandise but also negotiate discounts, and guarantee the allocation of the goods.”
The seed of the idea for Finkargo started in 2019, when Molina, who founded and ran Finamiga-Uni2, a microfinance institution in Colombia, got a call from Shuk, his brother-in-law, who founded Key Logistics Group, a freight forwarder based in Colombia, asking for advice. Shuk asked Molina, whose company had originated more than 40,000 micro-SME loans over the years, if he knew of a product that could help his importer clients access capital locked up in their freight shipments. Molina understood the challenges SMEs face in securing financing and reached out to everyone he knew in the financial sector, but no one seemed to understand how to serve this market. After a year of knocking on all the doors he could and coming up empty-handed, Shuk and Molina decided to build the solution themselves. To do so, they brought on Ferrer, a long-time high school friend of Shuk’s, as a third co-founder and COO. Ferrer had led three successful tech turnarounds in Latin America over the years and had the technical chops needed to build out the technology to make the platform a reality.
A platform built on alternative real-time data
Traditional credit players and banks are blocked from this market by a host of challenges: lack of reliable data to analyze SMEs, slow paper-based approval processes, and high rejection rates. Finkargo was able to circumvent these hurdles by building a credit score that uses data from ports, customs authorities, and shipping lines. Finkargo gathers data reported regularly to local authorities on what is coming in on shipping containers in order to analyze how SMEs manage their supply chain. The platform’s credit scoring algorithm also looks back on an importer’s trade track record and financial statements to complete Know Your Customer (KYC) and Anti-Money Laundering (AML) checks and come up with an accurate credit analysis.
Because it’s fully automated, this process allows SMEs to access trade financing through the digital platform in as little as 48 hours from submitting their application, versus the traditional bank underwriting processes, which can take up to 100 days. Finkargo has streamlined the credit application for users to take seven minutes to complete. And the platform also includes an integrated shipment tracking system so that users can track exactly where in transit their cargo is at any given time via the platform. For SMEs like ZMR, Finkargo also offers financing on shipping costs in addition to inventory purchasing, a feature that has been especially useful during the latest supply chain crisis when shipping costs have shot up astronomically.
Finkargo went live with its fully digital import financing product in Colombia in June 2021 and has since financed more than 260 import operations worth over $12 million, growing at a rate of 40 percent each month. In the first four months of 2022, Finkargo already tripled its team to 46 people in Colombia, Mexico and the USA and is expecting to double it again by the end of the year, while aiming for 10 times annual growth.
Empowering SME importers to grow their business
Finkargo’s AI-based alternative data model not only enables the platform to make better lending decisions based on an SME’s track record. It also enables SMEs to make smarter business decisions overall using the end-to-end purchase process data Finkargo captures and runs through its business intelligence. “The more data we have from the SME, the more we can help them make better decisions on supply chain, transportation times, and cash flow to improve their bottom line,” says Molina. “This empowers them to know what’s going on with their shipments.”
Finkargo sees its platform as a crucial bridge between the worlds of logistics and financing. By breaking the barriers of a rigid financial system, combining that with the logistical knowhow of international trade, and blending the two through technology, the founders see themselves as spearheading a new asset class. “We are essentially using the cargo they are transporting as collateral,” says Molina. “We are technically financing the boxes on top of a ship.”
Future growth of LatAm intercontinental trade
While Finkargo started by underwriting risk in Colombia, the company just launched operations in Mexico, making financing available to SMEs there as well. By integrating Mexico, Molina says the platform will bridge trade between the two countries by not only financing, but de-risking international transactions and soon expanding into more countries across LatAm including Brazil, Peru, Ecuador and Chile.
Finkargo sees intercontinental trade as crucial to the overall economic growth of Latin America. The deeper Molina and his co-founders dug into the trade finance gap in the region, the more they began to understand that the problem wasn’t just access to financing, it was also a lack of intercontinental trade. Latin America represents only six percent of all international trade and only 14 percent of what is exported in the region is traded within the region, compared to East Asia, which trades more than 40 percent of its goods intercontinentally and Europe, whose countries trade closer to 60 percent of what they make amongst themselves.
Finkargo’s long-term goal is to reduce the risk of trade between countries in the region to help strengthen and expand intercontinental trade. “There is no inclusive financial system for intercontinental trade. We see a huge impact in transforming trade for Latin America,” says Molina. “We want to break down those barriers so all these SMEs can participate in a globalized market.”
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