Financing SMEs and Entrepreneurs 2020

31. Mexico

Key facts on SME financing

In Mexico there are 4 million SMEs, of which 97.4% are microenterprises that represent 12.4% of total gross production (TGP) and employ 47.2% of the workforce.

In 2018, the average interest rates varied according to the amounts of the loans and the size of the borrowing company. For large companies, the average interest rate was approximately 11.78%; For SMEs, the average was 17.70%.

In recent years, the Mexican government has developed a series of initiatives to support entrepreneurs and strengthen the access of SMEs to finance. These initiatives have included programs to promote the entrepreneurship of young people and women and programs to strengthen alternative financial instruments, in particular the use of venture capital by SMEs.

Guarantee funds have also been used to develop more specific programmes. For example, government initiatives were developed to support the provision of credit to previously ignored companies, such as construction companies, travel agencies, real estate development, rural tourism, small taxpayers and government SME providers1.

Finally, the increase in competition among financial intermediaries has generated a significant improvement in credit conditions, which has resulted in longer loan maturities and lower interest rates.

Table 31.1. Scoreboard for Mexico

Indicator	Unit	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
Debt
Outstanding business loans, SMEs	MXN billion	…	…	199.0	220.9	256.8	310.9	423.6	481.7	548.1	738.1	821.3	..
Outstanding business loans, total	MXN billion	…	…	975.1	1054.3	1218.7	1299.5	1424.7	1518.7	1758.3	2059.6	2357.5	..
Share of SME outstanding loans	% of total outstanding business loans			20.4	21.0	21.1	23.9	29.7	31.7	31.2	35.8	34.8	..
New business lending, total	MXN billion	…	…	…	79.3	164.4	80.8	125.3	93.9	239.6	301.3	297.9	..
New business lending, SMEs	MXN billion	…	…	…	21.9	35.9	54.1	112.6	58.2	66.4	190.0	83.2	..
Share of new SME lending	% of total new lending				27.7	21.8	67.0	89.9	61.9	27.7	63.1	27.9	..
Outstanding short-term loans, SMEs	MXN billion	11.1	41.3	39.1	30.8	30.0	36.9	34.3	12.5	17.7	21.7	32.1	23.8
Outstanding long-term loans, SMEs	MXN billion	10.8	22.4	38.5	36.6	44.2	60.1	80.9	89.0	90.1	107.1	99.1	115.3
Share of short-term SME lending	% of total SME lending	50.6	64.8	50.4	45.7	40.4	38.0	29.8	12.3	16.4	16.8	24.5	17.1
Government loan guarantees, SMEs	MXN billion	0.8	1.1	1.9	2.3	3.0	3.0	3.7	4.3	3.2	2.7	1.9	4.0
Government guaranteed loans, SMEs	MXN billion	21.9	63.8	77.7	67.4	74.3	96.9	115.1	101.6	107.8	128.8	84.3	84.3
Direct government loans, SMEs	MXN billion	…	…	29.5	30.8	53.3	63.0	88.1	135.4	183.8	111.1	131.2	139.1
Non-performing loans, total	% of all business loans			1.9	1.9	2.2	2.1	3.6	3.2	3.1	2.3	2.2	1.6
Interest rate, SMEs	%	19.9	16.2	12.1	11.9	11.4	11.2	9.9	9.2	9.1	11.0	17.0	17.7
Interest rate, large firms	%	7.4	8.0	8.1	7.9	7.7	7.6	6.6	6.0	6.0	8.1	10.6	11.8
Interest rate spread	% points	12.4	8.3	3.9	4.0	3.8	3.6	3.4	3.2	3.1	2.9	6.4	5.9
Non-bank finance
Venture and growth capital	USD billion	4.1	1.7	1.8	4.3	2.5	4.0	1.8	6.9	11.9	4.5	4.0	1.6
Venture and growth capital (growth rate)	%, Year-on-year growth rate	…	-57.2	2.4	139.9	-41.2	60.9	-54.8	278.3	71.9	-61.8	-12.1	-60.9

Note: Venture capital data were updated for previous years by the by AMEXCAP (association for the private equity industry in Mexico).

Source: See Table 31.2.

SMEs in the national economy

SMEs play a strategic role within the Mexican economy. Information on SMEs is primarily generated through the National Survey of Productivity and Competitiveness for Micro, Small and Medium Enterprises (ENAPROCE), which is conducted by the National Institute of Statistics and Geography (INEGI). In 2015, the survey reached 20 127 SMEs from Mexico’s 32 states which renders it one of the most wide-reaching surveys for SMEs around the world. According to the 2015 survey, there are 4 million SMEs in Mexico, which altogether account for 99.7% of all private enterprises, 62.6% of private-sector employment, and 35.2% of national total gross production.

However, only 14% of these firms export to the international market, and less than 2% invest in innovation that leads to patent or brand registration.

SME lending

Banks offer different types of financing to SMEs, ranging from simple credit to revolving credit, to commercial credit cards. The demand is higher for simple credit, which represents 67% of the total credit volume for companies. Loan maturities usually range between 21 and 60 months, since loans to micro and small companies usually have long maturities. In general, the credit terms differ according to the size of the company.

Commercial loans to SMEs increased by 4.8 in 2018. On average, interest rates on all loans granted to SMEs in that year were 17.70%.

However, despite the positive trends in bank loans to SMEs, many of them remain unattended by formal banking institutions, and still others face limited access to credit. In 2015, several new programs were introduced to address these problems and promote specific loans, for example, for example to young entrepreneurs or women-led SMEs.

Credit conditions

Credit conditions have improved in recent years, as evidenced by lower interest rates, higher loan amounts and more favorable loan terms. Average interest rates generally depend on the size of the borrowing company. For large companies, the average interest rate in 2017 was 11.78%. For SMEs, the average rate reached 17.70%. The difference between the two fell considerably between 2007 and 2017, but increased in 2018 due to an increase in Banxico's benchmark rates.

Similarly, the average loan term increased from the 2009 average of 22.3 months. In 2018, the loan terms were on average 33 months.

Finally, general credit coverage expanded as new financial institutions were created, thus improving competition and product diversification. These developments were the result of the support provided by the federal resources mainly through the Development Funds and the Development Bank.

Alternative sources of SME financing

Venture capital

The venture capital industry in Mexico is still quite young. According to data gathered by the Mexican Private Capital Association (AMEXCAP), there was no VC activity in Mexico in 2007. However, registered venture capital totalled USD 102 million in 2008, and USD 128 million in 2009, a 25% growth year over year. In 2010, however, VC investments decreased by 88%, to USD 15 million and since then the VC segment has become rather volatile. VC investments reached their peak of USD 231 million in 2014, but decreased the following two years. In 2016, raised venture capital amounted to USD 165 million.

The progress observed in the venture capital industry, particularly between 2013 and 14, was mainly the result of a program created by the National Entrepreneurship Institute (INADEM). During those two years, INADEM launched 26 venture capital funds (15 in 2013 and 11 in 2014). In 2015 and 2016, INADEM’s strategy was to focus on better targeting investments (both sectoral and regional), and created 14 funds (7 in 2015 and 7 in 2016). As a new strategy to maximize the public resources, in 2017, two funds were supported by INADEM, co-investing a minor percentage that the former funds, encouraging the inclusion of new investors.

Growth capital investment is more widespread than VC investment in Mexico and amounted to USD 4 055 million in 2007. However, as a result of the financial crisis, investment levels decreased the following years to USD 1 734 million and USD 1 697 million in 2008 and 2009, respectively, and fluctuated between USD 1 500 million and USD 3 500 million until 2014. In 2014, growth capital increased by 194% reaching USD 5 513 million and grew an additional 92% in 2015. In 2016, growth capital investment decreased by 64%, to USD 3 790 million. In 2017-2018, volatility was still at play, the market reached USD 5 672 and decreased to 1 558 the following year.

Programme to foster the venture capital industry

In 2013, INADEM created the Programme to Foster the Venture Capital Industry, which aims to support the creation of VC funds and promote the development of a high-impact ecosystem, by encouraging access to new financing/investment sources.

The programme aims to enhance VC investments through co-investments in national and foreign funds that invest in highly innovative Mexican companies.

From 2014 to 2016, besides co-investment resources, the Programme facilitated grants for:

• Set-up expenses;

• Due diligence expenses; and

• Training courses for new fund managers.

In 2017, INADEM decided to focus its support on the co-investment program. As a result of the support of 40 investment funds, USD 51.8 million were invested in 224 companies from 17 different sectors during the 2013-18 period.

Resources are targeted at Mexican start-ups with high-impact projects that, aside from the funding, also receive mentoring and counselling in order to achieve scale more successfully. As of today, the fund is beginning to yield profits and also benefit from co-investments from Silicon Valley funds.

Angel Investment

In 2018, INADEM started to promote the development of the angel investment industry, by creating a pilot program to incentivise the participation of the potential investors in providing smart capital to early stages projects. With the development of the VC industry, INADEM detected that many of the VC Funds needed to fill the gap in early stages projects, giving with this the structure required to ensure a better position for the entrepreneurs and investors in the subsequent investment round. The development required the inclusion of both entrepreneurs and investors in order to ensure that they could develop the necessary skills to take the right decisions for valuation and equity commitments. The scope for the first stage of the program is to train 90 entrepreneurs and 115 angel investors.

Crowdfunding

In 2015, to contribute to the development of new and innovative financing mechanisms, INADEM granted MNX 10 million to the project “Crowdfunding Ecosystem Acceleration in Mexico to Promote Entrepreneurship, Innovation and Economic Inclusion”. The project aims to support entrepreneurial development and define new innovative financial mechanisms that are pertinent in the digital era. The project is promoted and financed by the Multilateral Investment Fund (MIF) from the Inter-American Development Bank (IADB).

INADEM added a new component to the project, the “Crowdfunding Pilot Programme”, which aims to support projects that have a social impact. The platform was launched in 2015 and has thus far enabled 17 companies to successfully complete crowdfunding campaigns.

Figure 31.1. Trends in SME and entrepreneurship finance in Mexico

Source: See Table 31.2.

Statlink

Table 31.2. Definitions and sources of indicators for Mexico’s scoreboard

Indicator	Definition	Source
Debt
Outstanding business loans, SMEs	Bank and financial institution loans to SMEs, amount outstanding (stocks) at the end of period; The company size is obtained based on the number of employees and the amount of annual income of the borrower, according to what was published in the Official Gazette of the Federation on June 30, 2009.	CNBV (2015)
Outstanding business loans, total	Bank and financial institution business loans to all non-financial enterprises, amount outstanding (stocks)	CNBV (2015)
Government loan guarantees, SMEs	Fiscal resources to guarantee programs provided	INADEM (2015c)
Government guaranteed loans, SMEs	Amount induced credit by the guarantee programs	INADEM (2015c)
Non-performing loans, SMEs	SME non-performing loans out of total SME loans as a percentage	CNBV (2015)
Interest rate, SMEs	Average annual interest, including rate and fee.	CNBV (2015)
Collateral, SMEs	Percentage of SMEs that were not required to provide collateral on latest bank loan	CNBV (2015)
Non-bank finance
Venture and growth capital	This concept includes Venture capital and Funds of Funds and was gathered by the Association of PE & VC funds (AMEXCAP).	AMEXCAP (2015) https://tutoriales.inadem.g ob.mx/convocatoria3.php ?id=112

References

Mexican Association of PE & VC Funds (AMEXCAP) ( 2019), Information based on AMEXCAP internal data. https://amexcap.com/

Nacional Financiera, NAFIN (2019), Based on internal data of the Venture Capital Area.

National Banking and Securities Commission (CNBV) (2015), Based on data published in: http://portafolioinfo.cnbv.gob.mx/.

National Entrepreneurship Institute (INADEM), Prepared based on internal reports Seed Capital Program generated by the Undersecretariat for Small and Medium Enterprises of the Ministry of Economy.

National Entrepreneurship Institute (INADEM), Call 3.2 Support to venture capital funds.

National Entrepreneurship Institute (INADEM) (2019), Own elaboration based on internal reports Entrepreneurs Program Banking generated by the Undersecretariat for Small and Medium Enterprises of the Ministry of Economy. https://www.inadem.gob.mx/fondo-nacional-emprendedor/

National Entrepreneurship Institute (INADEM) (2019), Own elaboration based on internal reports of the National Guarantee System developed by the Ministry of Economy.

National Institute for Statistic, INEGI (2014) Censos Económicos. http://www.inegi.org.mx/est/contenidos/Proyectos/encuestas/establecimientos/otras/enaproce/default_t.aspx

Note

← 1.  Government SME provider are those SME that supply the federal government with goods or services. Small taxpayers are related to the Tax Incorporation Regime (RIF), a new scheme of optional taxation introduced in the Tax Reform approved in 2013 for individuals who perform business activities with income of less than two million pesos