The Chilean scoring firm for evaluating companies works with machine learning to identify both risky businesses and good payers. Its model has been so successful that now even banks are looking to use its tool.

In the second quarter of the year, the Latin American economy showed mixed signs of post-pandemic recovery, with a recent OECD report showing that in the region, only Costa Rica has performed well, growing at 1.5%. While Chile experienced a 0.6% contraction in its economy after a 2.1% growth in the first quarter. Peru and Colombia, meanwhile, fell to 0.1% from 1.2% in the first quarter.

In this context, small and medium-sized enterprises (SMEs) are the ones facing the greatest challenges, often led by poor access to financing, which in turn continues to be a significant obstacle to the economic development of the region.

The magnitude of the problem is considerable for those working in this sector. According to estimates by the International Finance Corporation (IFC), part of the World Bank, the global financing gap for formal MSMEs reaches US$ 5.2 billion, while for informal MSMEs it stands at US$ 2.9 billion.

It is in this context that the Chilean technology company RedCapital has developed a growing portfolio of SMEs that use its technological scoring service , the process in which the credit risk of an entity or person is evaluated. This is a process that is often painful and unequal for small businesses.

"Often, when a bank wants to analyse the risk of an SME, it wants audited financial statements, which is a very high barrier for SMEs," explains Gustavo Ananía, founder of RedCapital.

The firm's working mechanism is explained by Ananía as follows: “We attract SMEs that need capital, we evaluate their risk and then we look for third parties to finance the operation. Although we have a bit of a crowdfunding arm , most of the capital comes from investment funds and the main banks in the region.  

The idea, which was born in 2013 when the term fintech was just beginning to resonate in the Latin American region, uses artificial intelligence and machine learning to evaluate the credit risk of SMEs in a more precise and efficient way than traditional methods.

"We started small, together with my partners Felipe Zanberk, also a civil engineer, and Raúl Mellis, a computer engineer. In 2015 we began to operate and little by little we grew, validating that our initial hypothesis when creating RedCapital was correct: SMEs are indeed good payers, and non-traditional data can be used to define which ones are risky and which ones are not," says Ananía when referring to the evolution of his service.

The secret of its success, explains the executive, lies in its ability to process data in real time from multiple official sources: internal taxes, judiciary, treasury and civil registry, among others.

"Our algorithm learns from past behaviour, which is called 'training the model', so the model becomes more and more refined. Currently the results speak for themselves, with RedCapital's bad debt rate below 0.3%," explains Ananía.

This learning capacity of its algorithm is what all the banks and financial institutions that work with RedCapital today have highlighted. “They tell us 'I no longer only want you [to] help finance SMEs, but I also need your algorithm to be able to finance the bank's clients that I am currently rejecting' and, obviously, our final objective is for more SMEs to be able to access working capital,” explains the founder .

Thus, one business attracted another business vertical, and what began as a direct financing platform for SMEs has transformed into a technology provider for financial institutions, as some banks, impressed by the system's ability to identify good payers among clients they considered risky, are now looking to implement RedCapital's algorithm in their own operations.

GROWING IN THE REGION

The risk assessment system developed by RedCapital is now used by the main banks in Chile, Colombia and now Peru, countries that the company reached in 2021 and 2018, respectively.

And although there are great similarities regarding SMEs in these latitudes, RedCapital's regional expansion has faced different challenges in each market.

In Peru, for example, the social unrest that followed Castillo's attempted self-coup had a significant impact on the economy. "This social unrest hit harder [than in Chile], because [in Peru] streets and highways, airports, ports were closed, so the economy came to a complete standstill," explains Ananía. "Obviously that affected large companies, which in turn had repercussions on all SMEs."

The situation worsened when high interest rates in the United States triggered a flight of capital, although Ananía says there are already signs of recovery.

The situation in Colombia has also shown significant progress. "We have closed the last few months with the main banks in Colombia and they have already recognized that we are the best platform they have ever operated with," says Ananía proudly.

The company's regional expansion reflects both the similarities and differences in Latin American markets. "The problems of SMEs in the three countries are more or less similar, in the sense that SMEs throughout Latin America have difficulties accessing financing," says Ananía, although he points out that Peru presents greater challenges for this sector than Chile and Colombia, resulting in higher financing rates for Peruvian SMEs.

"Peru has a little more informality than the rest and also has a more concentrated and less competitive financial industry than that in Chile and Colombia, where there is much more competition," explains the founder .

A QUESTIONED SECTOR

A recent scandal with political ramifications in the factoring sector in Chile, known as the 'audios case', far from harming RedCapital, has strengthened its position in the market.

Their technology has proven especially valuable in identifying fake invoices and risk patterns that might go undetected in a traditional assessment.

"The robot makes a lot of cross-checks. It sees this supplier and this client, how long they have been together, how the business relationship is going, how the sales trend is between the two, if there are credit notes, cross-sales, related companies..." explains Ananía.

The platform's ability to process large volumes of information in real time and detect risk patterns has proven particularly valuable in fraud prevention.

"When a person has to analyse all of this, it is almost impossible not to overlook something. On the contrary, technology does it in a minute. It is capable, for example, of seeing if an invoice that I issued was issued to a company where I am also a partner," explains Ananía.

The company has maintained an impressive growth rate, with an annual average of 130%. This growth has been initially financed through bootstrapping, followed by funds from Corfo and later by investment from HCS Capital, a Miami-based fund, and Seedstars, a Swiss incubator.

RedCapital's current business model operates on two main fronts: factoring and traditional credit, although its ability to offer these services depends largely on available funding.

“The pandemic caused a temporary shift towards factoring , due to the shortage of capital for long-term loans, a situation that is gradually rebalancing with the normalisation of interest rates,” he explains.

In the future, according to Ananía, the challenge for SMEs in the region goes beyond access to financing. The civil engineer also warns that a possible disappearance or reduction in the number of SMEs could lead to greater economic concentration in which only the big players are present.

This is why he believes that coordinated measures by governments are necessary to effectively support the sector.

"The situation of SMEs is [permanently] difficult, because public policies are often designed for large companies and the same rules are applied to large companies as to SMEs, but their realities are very different," he concludes.