Accessing working capital through digital platforms run by fintech companies

What it does: The experiment will identify the barriers that SMEs face to access fintech factoring services in Colombia and will develop strategies to reduce or eliminate those existing barriers trough public policy recommendations. SMEs are a fundamental sector of the Colombian economy, representing 90% of the business fabric and generating 60% of employment. However, MSMEs face difficulties in accessing financing, which limits their growth and development. Factoring is a financing alternative that allows MSMEs to obtain early liquidity in exchange for assigning their accounts receivable to a factoring company. Fintechs have developed digital platforms that offer factoring services in a more efficient and accessible way for MSMEs.

Value proposition: With this experiment, UNDP can facilitate access to diverse alternative financing tools for MSMEs, seeking a more efficient use of resources by providing working capital financing options that are less expensive than traditional ones.

Why and when to use it: This tool is most useful when SMEs face different access barriers to financing and lack of liquidity because of the long collection periods for invoices generated by their sales. Likewise, when SMEs have a low capacity for indebtedness or low access to credit. These conditions open an opportunity for the use of fintech factoring as a tool for access to financing for SMEs.

Known issues and troubleshooting: Fintech factoring must be regulated, and their activities must be supervised by a governmental entity. To guarantee competition of services, the fintech factoring ecosystem should be activated and with participation of different companies.

Context: One of the main obstacles faced by MSMEs in Colombia is the long collection periods for invoices generated by sales, which generates significant liquidity problems for companies. The low capacity for indebtedness and not meeting the requirements requested by the financial institution are the main reasons why microentrepreneurs cannot access credit and other sources of financing. In addition to the above, Colombia is one of the countries where it is most expensive for MSMEs to take out a loan due to high interest rates. In this context, there is an opportunity to develop an experiment that allows identifying the barriers to access for MSMEs to these financing mechanisms aimed at generating liquidity, through a knowledge and support path for the use of factoring with the support of companies from the Fintech ecosystem, jointly designing public policy recommendations and regulatory adjustments that facilitate access to these sources of financing.

Cost: The cost of the experiment is approximately USD 60.000, in this case provided by USAID. These resources will be used in implementing the different experiments and supporting the research as part of the process.

People:

1. Innovative financing advisor: Identifies the opportunity and gives strategic advice and support for the design and implementation of the experiment, guarantees coherence and value to the broader fintech agenda.
2. Innovation and Experimentation Advisor: Supports the design and implementation of the experiment.
3. Technical expert on financial inclusion: Guarantees coherence with the financial inclusion agenda.
4. Technical expert on innovation and fintech: Leads the design and implementation of the experiment with the fintech companies and leads coordination with the fintech ecosystem.

Focal point: Lina Fernandez, Juan Martin, Juan David Ordoñez , and Diana Muñoz.

Country, year, and language: Colombia, 2024, Spanish.

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