Why Solving Lending in LATAM Is So Hard (and Still Worth It)
If the need is so huge, why is it so hard to build a sustainable lending business in LATAM?
When we talk about credit in Latin America, we’re talking about one of the region’s biggest paradoxes. On one hand, there’s an enormous unmet demand: millions of underbanked consumers and a $1 trillion+ SME financing gap. On the other, the challenge remains steep, and the reason isn’t demand, it’s defaults that keep models from scaling sustainably.
Consumer Lending: Volatility at the Core
Approximately 70% of LATAM’s population is either unbanked or underbanked, while only 28% of adults have consistent access to financial institutions (World Economic Forum).
Consumers face annual microloan rates between 20–45%, peaking over 100% in extreme cases.
With high rates, defaults remain elevated. Economic shocks, inflation, and informal employment mean delinquency rates can spike overnight.
This constant tension, high rates and high defaults, makes sustainable consumer lending one of the toughest challenges in fintech.
SME Lending: The Trillion Dollar Credit Gap
SMEs represent 99% of businesses and employ more than 60% of the workforce in the region, but face a financing gap of over $1.8T USD (World Bank).
In Mexico, only 35–50% of SMEs have access to formal credit, while in Colombia and Peru rejection rates exceed 90% (IDB).
Even when loans are granted, SMEs pay 50–150% higher interest rates than large firms (Columbia SIPA).
Why? Again, defaults. Informality, lack of collateral, and fragile cash flows make SME loans look like high-risk bets.
Regulation and Investor Caution
Governments across LATAM have tried to encourage inclusion through programs and credit guarantees, but regulation remains fragmented. In some markets, strict compliance rules raise the cost of lending; in others, weak enforcement discourages institutional investors from providing long-term capital.
For VCs and LPs, this creates an additional hurdle: even when startups prove they can manage default risk, scaling often requires navigating a patchwork of regulatory frameworks across countries.
Technology as the Differentiator
If defaults are the main barrier, tech is the main lever. Startups are experimenting with:
AI-driven scoring models using telco, e-commerce, and POS data.
Embedded finance that plugs directly into platforms SMEs and consumers already use.
Alternative repayment models like revenue-based financing or supplier-linked credit.
For example, Lounn in Mexico has deployed over MXN $160M by streamlining SME loan applications with AI, connecting businesses to multiple funding sources faster than banks ever could.
Some Startups Are Still Betting
Despite defaults being the elephant in the room, fintechs are proving that new models can bend the rules:
Baubap (Mexico): Using AI and alternative data to underwrite the unbanked, with $600M+ loans disbursed.
Lounn (Mexico): Tackling the SME gap through an automated credit marketplace, providing businesses with capital access that traditional banks reject.
Takeaway
Lending in LATAM isn’t hard because people or businesses don’t want credit, it’s hard because too often, borrowers can’t pay it back. Default rates are the single biggest barrier to scale.
For founders, the mission is clear: design products that mitigate defaults without making credit unaffordable. For investors, it’s about finding the teams who understand that the real fight in LATAM lending isn’t customer acquisition, it’s beating defaults at scale.
Portfolio Companies
News about our Portfolio Companies
Portfolio companies currently raising investment rounds
Ximple: They are transforming financial access in Latin America by empowering resellers with working capital, digital tools, and new income opportunities. Currently raising their seed round.
Supervisor AI: A platform to convert every business conversation generated into growth opportunities and actionable insights. Currently raising a $750k USD investment round.
Please don’t hesitate to contact us in case you are interested in connecting with any of these amazing companies.
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Cacao: a fintech platform empowering Brazilians—especially freelancers, creators, remote workers, and remittance recipients—to receive income in USD or crypto and convert it instantly to Brazilian reais via Pix, all within a streamlined mobile app.
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