The 3 most important things to consider when raising your first debt raise in Latam

If you are a founder, CEO, CFO, COO of a Latam capital intensive company, check out my list of the three most important topics to consider when looking for debt. Just like understanding equity term sheets is of the utmost importance, these are equally fundamental to provide understanding to investors.

1. Advance Rates:

TLDR: You will need a substantial amount of equity.

Debt investors seek to minimize their risk and align their incentives with yours. They do this by ensuring that you put something valuable on the transaction along with their money, so you also have something to lose if things go south (whether intentionally or not). The lender wants to be on the same boat with you, so both parties have a shared interest in ensuring the boat stays afloat and reaches its destination. For every dollar you lend out, they expect you to put, say, 30% in equity. This means if things go wrong, you’re the first to bear the losses, as you’re in the primary position to lose your investment. Therefore, if you plan to grow your loan book by $10M, you’ll need at least $3M USD in equity to align incentives with the lender.

What should you take into account?

It’s crucial to understand how much capital your business needs. This will make conversations with the lender more comfortable and the thought process of arriving at that number will help you significantly. If your lender aims to minimize downside risk, they may decrease the advance rate to 60%, and you’ll need to put 40 cents per dollar or $4M instead of $3M for the same $10M new credits.

By having a solid understanding of the advance rates, you can align your incentives with the lender, build trust, and secure a favorable lending position.

2. Currency:

TLDR: Choose the lender that best suits your business.

• Do they require a hedge? If your assets are in a different currency than the lenders, ensure you have a hedge strategy in place, and clarify who pays for it. Keep in mind that a forward can cost roughly 6-8% annually, depending on the country. If they quote you 10% plus hedge, your borrowing cost is 16-18% in local currency, excluding additional expenses such as fiduciary fees and other service providers.


• Who is contracting the hedge? Start those conversations with the provider of the FX derivatives as early as possible. They need to understand your business before providing access to certain derivatives. Especially in emerging markets such as those in LatAm, derivatives providers are very risk averse and take a long time to provide access to new or startup companies.

By factoring in all costs and finding the currency that best suits your business, you can set your business up for the long run.

3. Structured Debt vs Venture Debt:

TLDR: Choose the type of debt that aligns with your business goals.

Venture debt is like a speedboat – it can get you to your destination quickly, but it’s also riskier and requires more skill to navigate. Structured debt, on the other hand, is like a cargo ship – it’s slower and less flashy, but it’s also more stable and able to weather rough waters. Both types of boats can get you where you need to go, but they have different trade-offs and are suited to different types of journeys.

I recently spoke with a founder who didn’t understand the difference between types of debt and only cared about the amount needed to raise. I’ll write a more detailed blog post on the trade-offs, but it’s important to understand how you envision your business growing since it impacts which type of debt you need.

If you’re looking to finance day-to-day operations and not a specific project or asset, corporate debt (also known as venture debt) is the most straightforward type of debt. Negotiations are faster since the lender looks at your balance sheet strength and lends against that. For most startups, the balance sheet is primarily cash, so venture debt lenders typically lend based on available cash.

Structured debt involves financing a specific capital intensive need, such as machinery for a new factory, or in the case of fintech startups, new loans to clients of new or existing products. Think of it this way: if what you need to finance is not straightforward, then the lender wants to “structure” around those risks to ensure the boat doesn’t sink. They want to have the most protections possible in case it does.

By understanding the different types of debt and their trade-offs, you can choose the one that best suits your business goals and secures a successful borrowing experience.

In short, raising debt in Latam requires careful consideration of advance rates, currency, and the type of debt itself. By understanding these factors, you can start to choose the right path for your company. Remember, the journey to success may require different types of boats, but with the right navigation, you can be as prepared to weather any storm.

By: Valentina Valencia

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