Bancóldex and Ruta N Unveil $1.4 Million USD Financing Fund for Startups

Bancóldex, a development bank for entrepreneurial business growth in Colombia, and Medellín-based Ruta N recently partnered to launch a 4 billion peso ($1.4 million USD) financing fund for Colombian startups and early-stage entrepreneurial companies.

This “Financing for Growth” program will target companies from all sectors that have the potential for double-digit growth by offering loans of up to 100 million pesos ($33,000 USD). Those that meet the initial standards will be eligible to undergo a consultation with experts at Ruta N who will work together with the entrepreneurs on their business plan in hopes of securing this financing on favorable terms.

Photo: Luis Fernando Castro, president of Bancóldex, detailed the institution’s new fund recently at Ruta N headquarters in Medellín. 

Both Bancóldex and Ruta N see this as an initiative that can help spur development and innovation in the region, and the organizations plan to monitor the progress in the years to come with hopes that it can become a model for accelerating growth.

“We are going to strengthen the capacities of these companies in the early stage by giving them knowledge and capital to accelerate their growth,” said Luis Fernando Castro, president of Bancóldex.

To share more details about the program and how it can fan the flames of entrepreneurship in Colombia, Fernando recently sat down to talk with Finance Colombia Executive Editor Loren Moss in Medellín.

“It’s not a subsidy — it’s more like a stimulus,” said Luis Fernando Castro, president of Bancóldex.

Loren Moss: So, if I understand correctly, there are 4 billion pesos available to lend, and any one company can borrow up to 100 million pesos? is that correct? Is that the structure?

Luis Fernando: Yeah. The total amount, 4 billion pesos, is approximately $1.4 million USD. The maximum loan is 100 million Colombian pesos, which is approximately $33,000 USD per company.

That’s the whole amount to start. We’re going to monitor to see how it works. It’s for up to three years. It has grace periods from three to six months, and it has a very competitive rate.

The idea is to give — I don’t want to use the word “subsidized” — but this is concessional rate, so the banks will in turn charge their spread and the end rate is going to be lower than traditional credit. So that’s what we’re aiming at.

Loren Moss: What was the genesis of this project? Where did the idea come from?

Luis Fernando: Bancóldex is engaged in a transformation — we’re migrating from a second-tier bank to a development bank. We have configured ourselves from the market, and by that we mean we are trying to understand what the levers of growth are in Colombia.

We have identified companies that are in early stages — not only startups, but “scale ups” of companies that have the potential to grow at double-digit rates — and we have decided to foster strategic alliances with regional players. In this case, we have partnered with Ruta N here in Medellín, where they have supported us with some funds that we used for the design of this particular line of credit with longer grace periods or a better interest rate and a longer time to pay back the loan.

The alliance is based on receiving an amount of money that we use to design a line of credit that better fits the particular focus of these companies. Usually the commercial banks do not understand these firms. So based on an understanding of that market, we’re trying to design financial instruments that better fit their needs.

Loren Moss: That makes a lot of sense. Has Bancóldex ever done anything like this before?

Luis Fernando: We have not in Medellín entirely, but we have made other alliances, even with financial resources that come from other government institutions. We have done so based on an innovation instrument that the government has available for fostering a particular type of entrepreneurship. And we have done so in the previous lines of credit, with very similar characteristics in terms of trying to stimulate growth in companies in early stages.

We have seen very interesting things. We have even had lines that stimulate double-digit growth in certain sectors of the economy, and if they keep growing at double-digit rates, we actually have a stimulus at the end to re-price them with a rebate of the interest rate. So, it’s not a subsidy, it’s more like a stimulus. It’s a prize for being more efficient, for growth.

Loren Moss: Who makes the decision? Who approves the financing? Is it a third-party bank or is it Ruta N who has the approval? Who is the one that evaluates the creditworthiness and says,“OK, this company qualifies for the financing?”

Luis Fernando: I think there are two moments in the process. The first one is that Ruta N has a group of companies that should first work with them through a preliminary assessment of the companies before they even go to the bank. This is important because they get a sort of “certificate” from Ruta N. Then once they have that checked, they can go to the intermediary for the request for the loan.

The intermediary could eventually, based on their assessment or their loan policies, say “yes” or “no.” But there is a higher probability of approval if the company goes through the process of Ruta N. There’s a higher percentage of success in terms of getting a loan than if the company just runs into a bank and asks for a loan without any type of mentorship or assessment.

The entrepreneurs are usually very creative. They have ideas. But when it comes to preparing and making a complete request for credit to a bank, they have some issues making it presentable or “financeable.” Ruta N can resolve those issues and help them in that previous stage.

(L to R) Juliana Ossa, extraordinary growth manager of Bancóldex; Luis Fernando Castro, president of Bancóldex; Alejandro Franco Restrepo, executive director of Ruta N; and Juan Fernando Estrada, business manager of Iconocimiento

Loren Moss: It’s always a challenge for early-stage companies to obtain financing, especially debt financing. That’s a problem anywhere in any economy — developed or at any stage in its development.

But here in Colombia, the banks and the financial system have traditionally been focused on hard-asset lending, such as real estate or equipment financing. Banks have been very reluctant to get involved in things like working capital for ventures, especially for early-stage startup and technology ventures.

Is there any work being done with those intermediaries to overcome those challenges? What’s being done to make it easier to lend money to these kinds of companies that we see here in Ruta N or throughout Colombia in general?

Luis Fernando: We are addressing this issue in three ways. The first one is that we are trying to work with the current financial intermediaries in Colombia, starting by designing a new line and trying to work together with them to make them better understand this particular market of companies.

You mentioned the type of guarantees that banks request to finance early-stage companies, which tend to have a higher level of risk. We’re also trying to not only develop lines but also activate intermediaries that better understand these types of companies. For example, in Medellín we’re trying to give access to financing to a non-regulated financial company — a non-traditional bank — specialized in this type of lending. They could perhaps do a better job of understanding this type of dynamics in this market. We have allocated an amount of money that we’re going to be lending to them so that they can in turn go to this company.

And the other thing is that we have our own financial instrument, in our first-year lending, which is a smaller company called “Leasing Bancóldex.” We’re also engaging and trying to gain a greater understanding of the realities of these companies, and the idea is also that we could channel through our own distribution. Those are three ways that we’re engaging in this process

With respect to risk, that’s one of the big challenges — not only with startups but with SMEs (small and medium enterprises) or even large corporations. The bank is trying to work on a pilot program. Here in Medellín we’re trying to make an effort with something that is called “guarantias mobiliarias,” which is different from the traditional real estate that you give as a guarantee for a loan. It allows you to use something like a patent as a guarantee. It can be an intangible asset — or something such as inventory in process of finished goods — that you can use to work around guarantees.

Maybe in SMEs or startups they don’t have a warehouse to give guarantees, so you can use what’s in your working capital, like from the inventory levels of raw materials all the way up to the finished product before you sell it.

We’re trying to pilot a program where these kinds of guarantees could be used by the banks as collateral so banks can give money for these companies to grow. So, yes, we’re certainly also making an effort in that direction.

This interview has been edited for space and clarity.