The President of the Republic, sanctioned on April 24, 2019, the law of the Simple Credit Company (ESC), which aims to make credit more accessible to entrepreneurs. The idea is that companies and / or individuals can lend using their own resources. According to Carlos Melles, president of Sebrae Nacional, “Each one will be able to be a bank, each one will be able to lend their capital.”
With the creation of the ESC, the Ministry of Economy intends to expand the credit supply by R $ 20 billion per year in the economy, if the number of thousand ESCs in the country is reached. This would represent a 10% growth in the credit market for micro and small companies, which totaled R $ 208 billion in 2018.
But is the question? So what is it, how does it work and, most importantly, will it help entrepreneurs get access to capital at a fair price? This is what we will talk about from now on. Check out!
What is ESC and how does it work?
According to Guilherme, former president of Sebrae Nacional, “a simple credit company is an individual who, without any authorization, because he does not need authorization, simply registers a company, which is simple credit, and starts to lend in your community, at an interest rate that will certainly be lower than what is offered in the region, because today the big banks get from everyone, but only lend to a few. ”
In short, ESC is a company that can have as its partners only individuals, limited to operating only in the city itself or in nearby cities and that needs to use only equity to grant credit or discount securities. In addition, the charging of fees and charges of any nature is prohibited. All ESC remuneration must come from interest remuneration.
The goal of the creators is to use the relationships created by some entrepreneurs to unlock lending in regions where the bank does not have strong performance. “This businessman will play the role of bank there, making the relationship he knows people with, knows the family he is lending to, knows if he is a good payer or a bad payer. In this case it is a much more word of mouth loan relationship, eye to eye, ”says Carlos Melles, President of Sebrae.
Does ESC solve small business access to credit? Do not.
Sebrae surveys indicate that 84% of small businesses cannot access credit. The money they have access to is through overdraft, credit card interest, postdated check, or through financing with their suppliers, which give longer payment terms. The problem of access to credit for most entrepreneurs is real.
But the reality of lenders shows that government expectations may be overestimated.
Lower interest credit
Will Simple Credit Companies offer cheaper lines of credit than banks for micro and small businesses? Granting credit is not an easy task. Credit Fintechs like Miss Marple have taken on the challenge of developing an internal credit analysis methodology using artificial intelligence and machine learning techniques . Even with all this sophistication, the interest rates charged by them do not differ much from the Brazilian average of 45% per year.
This is due to the fact that segment delinquency rates are higher than average, which obliges lenders to charge higher interest rates to compensate for any losses. ESC, with less structure to develop a credit methodology, should be more exposed to delinquent clients. Eventually personal relationships with clients may also undermine a rational judgment of the case when granting the loan.
Simple and fast approval process
Certainly an ESC will have faster and less bureaucratic processes than banks, financiers and credit fintechs . This does not necessarily mean a more efficient process. While companies have specialized credit analysis teams, an ESC entrepreneur will have to do much of the credit analysis on his own, which should create bottlenecks as more applications enter.
In addition, as the first loans are granted, collection processes will become a priority in the ESC entrepreneur’s mind. Between granting a new loan and collecting an already made loan, the second option will be more attractive.