Growth Factor

Invoice factoring set for post-pandemic growth in Peru and Chile.

The Coronavirus pandemic has accelerated the digital transformation of businesses in Latin America. This should act as an accelerator for the growing invoice factoring industry to provide liquidity solutions to small and medium sized businesses, when they need it the most.

An executive of a factoring business in Peru sees opportunity for growth, “What is wonderful here is that electronic invoices are issued by SUNAT (the tax authority) and so, the invoices are inspected and formalised and there is less risk of fraud.”

Factoring of invoices is a growing business in many Latin American countries and its use as a source of liquidity is being accelerated by financial technology, an underserved SME market and the cashflow challenges presented by the pandemic.

An executive at the Factoring Association in Peru reports some strong growth being hit hard by political instability and the pandemic, “The factoring industry has seen double digit growth recently (89% in 2018 and 63% in 2019 – including some political instability) but volumes this year have reduced by 50%.”

“The factoring industry has seen double digit [percentage] growth recently.”

Factoring Association, Peru.

Additionally, only 6% of small businesses have access to bank finance – this is exacerbated by the size of the informal economy, but it is still proportionally low. Factoring could be a very valuable solution to SME’s as even without a credit history, small businesses can access credit as the risk is measured on the debtor. The regulatory environment is also improving in Peru. The executive at the Factoring Association in Peru reports, “We learned from mature markets such as Chile and Brazil and new regulations are coming out on 10 November, which will increase the bargaining power of SMEs and their financing providers.”

The pandemic has caused a rise in delinquency in Chile and Peru, nearly doubling in the latter from 5% earlier in the year up to May but falling back to 8% today. There is no general diagnosis for this, some sectors have performed better than others but the trend is downwards.

“Many factoring businesses struggle to access financing, making it difficult for them to grow.”

Managing Director at an investment bank, Chile.

A Managing Director at an investment bank in Chile told us, “Historically, factoring companies have capitalised on market volatility but in recent months volatility has been extreme and is compounded by a lack of liquidity. Many factoring businesses struggle to access financing, making it difficult for them to grow.” This has led the industry to seek government support, a strategy consultant in Chile says, “The interest of factoring companies to be included in government plans is notable, but the political aspects are highly complex and it is likely that developing a solution that includes them will take too long.”

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