A majority of Latinx businesses are under-capitalized and under-resourced to scale to reach their maximum potential. Camino Financial is the small-and-medium-sized businesses marketplace lender that connects Latinx businesses to capital. Camino Financial understands the specific pain points that a Latinx business owner faces – 25%of its members lack a credit history and 65% have less than $5K in their bank account at the time of securing a loan. The company, founded by two twin brothers in 2014, has already facilitated loans exceeding $30M with an optimal credit performance and the company has grown 400%+ YOY.
La TechWatch sat down with CEO and Cofounder Sean Salas to learn about the importance of building out and serving as a pioneer in this growing market, the company’s future plans, and most recent round of funding, which brings its total funding raised to $20.4M.
Who were your investors and how much did you raise?
It was an $8M Series A round led by Crédito Real, a Mexico-based financial services company with a regional presence in Latin America and the United States.
Tell us about the product or service that Camino Financial offers.
We are a fintech platform pioneering affordable access to loans to the underbanked Latinx business market. We are building proprietary artificial intelligence software to aggregate data and building machine learning models to drastically reduce financing costs for thin-file, cash-based microenterprises.
What inspired the start of Camino Financial?
I cofounded Camino Financial, alongside my twin brother Kenny. Our mom was an entrepreneur who opened over 30 restaurants, only to see her small empire crash down like a house of cards. This was a character-building moment for me and Kenny. It showed us the vulnerability of our mom’s small business and many like hers in the Latinx community. The great majority of Latinx businesses are under-capitalized, under-resourced, and under-educated to scale and sustain shocks in the market or from larger competition. Camino wants to change that trend and empower Latinx businesses through capital and financial education.
How is Camino Financial different?
Structurally, all other tech-enabled SMB lenders cannot do what Camino Financial does in addressing the unmet credit demand in the Latinx SMB market.
Many people ignorantly believe affinity-oriented platforms, like Camino Financial, are simply “market plays.” We translate our application and content in Spanish, and voila, you’re now a Latino-oriented lender.
But when you look at the data, you start realizing how different the Latinx business is. Of all our members, 90% are Latinx, 25% do not have a credit history, and 65% have less than $5,000 in their bank account at the time of purchase. Moreover, the typical Camino Financial member generates $300,000 in annual revenue. We’re talking about thin-file, cash-based microenterprises. It just happens to be this credit profile is prominent in the Latinx community. We are determined to change that.
Let’s not forget the financial education component. We have a motto at Camino Financial, “capital in isolation is not the solution.” In fact, this is an area where we plan to leverage artificial intelligence as a means to scale how and when we educate our members.
What market is Camino Financial targeting and how big is it?
We’re targeting the US Latinx market, and it is absolutely huge and totally underserved.
It generated $2.3 trillion in GDP in 2017, making it the 8th largest economy in the world and the largest Hispanic market (bigger than Brazil and Mexico). We’re currently focused on Latinx-owned businesses. This segment is currently growing at a rate that is more than double that of non-Latinx-owned businesses: between 2012 and 2018, the number of Latinx-owned businesses in the U.S. increased by 40.2%, compared with 18.8% for all U.S. businesses.
We estimate the unmet credit demand of Latinx businesses is in the range of $6.8 billion.
Latinx aren’t some niche market – they’re the engine fueling growth in the American economy. Latinx are the New Mainstream Economy.
Who do you consider to be your primary competitors?
Because our market is severely underserved and we’ve developed proprietary tech that addresses structural issues in helping Latinx-owned businesses access affordable capital, we don’t have any direct, tech-enabled competitors in the market.
Some indirect competitors primarily include personal lenders, predatory or informal business lenders, and non-profit Community Development Financial Institutions (“CDFIs”).
Over time, we expect that to change once the marketplace sees us in action, but in the meantime, we’re building as much runway as possible. Let me be clear, I think competition is great for the Latinx market and the market is big enough. We’re proud to be leading the charge.
What’s your business model?
We operate as a marketplace lender. We earn two sets of fees upfront, one paid by the borrower and another paid by the debt investor funding the loan. The debt investor finances 100% of the business loan. In addition, we have structured strict covenants and incremental incentives to further align economic incentives between Camino Financial and our debt investor.
What was the funding process like?
Crédito Real has been amazing. We had multiple interested parties, but Luis Berrondo (M&A and Business Development Officer of Crédito Real) and his colleagues saw the opportunity and worked with us to develop a plan to make it work.
What are the biggest challenges that you faced while raising capital?
Numbers don’t lie. Less than 2% of venture capital goes to Latinx-founded companies. I am a fundamentalist in believing, unless you change diversity among investors, you will never change the diversity in venture-backed entrepreneurs. The reason is simple: non-diverse investors simply don’t understand the pain points unique to diverse markets, so they don’t give these businesses the benefit of the doubt. The leap of faith in diverse markets is missing among those who are deploying venture capital.
To make matters tougher, at Camino, we had to convince both equity and debt investors about the unique opportunity in the U.S. Latinx market. It was actually harder to get the debt capital partner since debt investors are by definition risk-averse, whereas equity investors are risk-takers. When you tell debt investors these loans are unsecured, 25% don’t have a credit history, and it’s super hard to measure cash . . . they send you out the backdoor and don’t respond to your emails.
This is why Crédito Real was the perfect partner for Camino Financial. From Day 1, they totally got it. Crédito Real had been actively investing and observing the U.S. Latinx market. They feel as lucky to have found us, as we feel lucky to have found them. You see, from Day 1, they gave us the benefit of the doubt. Then, it was easy to base the rest of the discussion on data.
Most investors stop at the headline risk.
Given our size, growth, and credit performance, that’s changing now for the Latinx-owned business credit market, and hopefully forever.
It was actually harder to get the debt capital partner since debt investors are by definition risk-averse, whereas equity investors are risk-takers. When you tell debt investors these loans are unsecured, 25% don’t have a credit history, and it’s super hard to measure cash . . . they send you out the backdoor and don’t respond to your emails.
What factors about your business led your investors to write the check?
If you ask Luis at Crédito Real, he’d say our management team, supported by a combination of understanding our target market, our experience, our tech, our plan and projections, and our track record all were factors in wanting to deepen their relationship with us. Before the close of the Series A, we had already lent out over $30M with optimal credit performance and were growing 400%+ YoY. By Series A, it was a bit of a no brainer for all of us.
What are the milestones you plan to achieve in the next six months?
We plan on continuing our growth path and actively building our data science team and capabilities.
What advice can you offer companies in Los Angeles that do not have a fresh injection of capital in the bank?
Well, if you’re a Latinx small business, come talk to me and we’ll see what we can do.
Seriously, the best thing to do is to have a vision for what you want to achieve, a solid plan for how to achieve it, and a rock solid team to execute. Also, be patient. In our case, success in fundraising was a function of a lucky break. We were in the right place at the right time for Crédito Real. Most importantly, we were prepared and ready to take on a partner of this scale.
For small business owners, my first piece of advice is to identify early on the type of capital that suits your needs. Venture capital or even a Camino Financial loan isn’t for everyone. Never lose sight of business fundamentals, since ultimately, you’re asking for someone to invest in you and your business.
You don’t have to go through this process alone, that’s why Camino Financial exists.
For small business owners, my first piece of advice is to identify early on the type of capital that suits your needs. Venture capital or even a Camino Financial loan isn’t for everyone. Never lose sight of business fundamentals, since ultimately, you’re asking for someone to invest in you and your business.
Where do you see the company going now over the near term?
In the next twelve months, we’re going to build out our tech resources to further develop our AI and machine learning tools to make even better use of our data; we’re going to greatly expand our borrower pool and further establish our leadership position in the market; we’re going to build new corporate distribution partnerships, and we’re going to develop new resources to help our members grow their businesses.
What is your favorite restaurant in LA?
Check out Playa Las Tunas Restaurant near DTLA owned by one of our members, Celso. He’s the nicest, most optimistic person you’ll ever meet. Everything on the menu is delicious, although I do recommend the pupusas.
