Eighty-percent of the world’s exporting small and medium-sized enterprises (SMEs) require financing and not all of them are able to obtain it, especially those located in developing countries, according to World Trade Organization (WTO) data.
Many of these SMEs need cash because they have to wait months to receive payment for their invoices, and which can even tip them into bankruptcy.
Fintech startup Drip Capital seeks to solve this global problem through the use of factoring and technology. In classic financial factoring, a company sells its invoices to a finance company in order to receive cash faster than it would if it were to collect the money itself. The startup created in the United States by Neil Kothari and Pushkar Mukewar leverages data analytics and technology to meet the demand of SMEs in an automated way.
In Mexico, companies’ lack of liquidity is a frequent problem, according to Edmundo Montaño Martín del Campo, CEO of Drip Capital in the country.
“Payment terms in Mexico are much higher than in many other countries because there is no regulation; here large companies are paying invoices between 120 and up to 180 days and for an SME that is super difficult to bear,” he said in an interview with Bloomberg Línea.
The market opportunity is large, given that Mexico is an exporting country. According to 2021 data from the WTO, Mexico is the eleventh largest exporter in the world. China, the United States, Germany, Japan, the Netherlands, France, South Korea, Hong Kong, Italy and Belgium, which make up the top ten.
Mexico exports 500 billion dollars a year and 80% of those exports go to the United States. “It is a very noble trade to finance, because the United States is a very solid country, the buyers of our exports from Mexico are usually quite solid companies,” Montaño says.
Drip Capital provides financing without requiring any type of guarantee from SMEs, since the guarantee is the account receivable they are financing. They also have trade credit insurance that cushions the risk.
“If the buyer cannot pay, they are insured,” Montaño explains.
Since its launch in 2015, Drip Capital has financed more than $2.2 billion in international trade transactions in the countries where it is located: Mexico, India, United Arab Emirates and Ecuador.
The fintech set up shop in Mexico in 2018, a market that has led Drip Capital to implement another line of business: domestic factoring, and not just export factoring. Montaño recalls that his first client was precisely his father, an SME entrepreneur whose lack of financing was keeping him awake at night.
“There are countries where, by policy or regulation, large companies cannot have such long credit periods with their suppliers. But in Mexico that does happen, so we decided to launch this domestic financing product, and it is growing faster than export financing,” explains Montaño.
This persistent problem in Mexico is giving rise to more startups seeking to solve it. Mundi is one of them, a fintech that emerged in 2019 with the mission of boosting international trade by leveraging technological solutions that allow the creation of payment and financing tools for exporting SMEs.
Financing in Times of Covid-19
Amid the pandemic lockdown in 2021, the challenges and problems in all global supply chains began, which seriously affected trade. According to Mexico’s Association of Importers and Exporters (ANIERM), the country had a trade deficit of $2.7 billion, compared with the surplus of $6.25 billion in 2020.
“We were the salvation of many clients, because we continued to lend and finance capital, when many banks started to stop doing so, so we were a lifeline for many companies,” Montaño says.
This allowed for a 400% growth in the number of clients in Mexico last year. However, the challenge he has had to overcome is that some companies in the country that pay their invoices in lapses of between 120 and 180 days do not want to work with third parties, despite the benefit of liquidity for their suppliers.
The fintech offers on average financing to SMEs of $2.5 million, or around 50 million pesos, which is usually enough for the segment of SMEs they target, with a turnover of between 300 and 400 million pesos a year. Although it has given more financing to larger companies with turnovers above 6 billion pesos.
Mexico has become a pillar for the company that was recently recognized by the accelerator Y Combinator as one of the top companies in its list of 267 private and public companies from 20 countries that are valued above $150 million dollars, and which comprises more than 60 unicorns.
To date, Drip Capital has raised over $520 million through venture and debt capital, including $85 million in equity capital through investors such as Accel Partners, Sequoia Capital, Wing VC, TI platform and Y Combinator. The company also has debt investment from banks such as Barclays Investment Bank and East West Bank.
By 2022, the growth projection is another 400%, says Montaño. And to go from being a financial company to solving other problems that exporting SMEs encounter, such as logistics, payments with suppliers and buyers, and connection between Mexican exporters and importers in the United States.
Drip Capital also plans to launch in other countries, such as Colombia and Peru.
