MercadoLibre is an online marketplace and auction website based in Argentina. The Spanish translation of the name is “free market” and it is similar in concept and scope to eBay; in fact, eBay is one of the major owners of the business. Today it is the largest e-commerce websites in Latin America and serves most Latin American countries.
e-Commerce in Latin America is booming. Just a few years ago there was little internet coverage in the region, but recently there has been a huge expansion and although by European standards penetration is still relatively low, it is changing the whole culture. Encouraged by the opportunities, this brings, many potential entrepreneurs are starting new businesses selling on the MercadoLibre platform, and are finding success.
There is, however, a problem: the availability of the initial capital to start such a business. Here we will look at the opportunities available to MercadoLibre sellers focussing on MercadoLibre loans.
The growth of MercadoLibre
Founded in 1999Founded by Marcos Galperin in 1999, the business was initially funded by several heavyweight backers and in 2001 eBay acquired a 19.5% share.
Acquired by DeRemateThe company went on to acquire DeRemate, a major competitor, providing it with a presence in several new countries. Further country coverage was added the following year and in 2010.
Global OperationsMercadoLibre now operates in Argentina, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Mexico, Ecuador, Peru, Panama, Portugal, Uruguay and Venezuela.
2015 Q3In its latest financial statement (third quarter 2015) the company reports a 26.2% growth in items sold reaching 34 million and achieving a revenue of over USD 1.8 billion.
MercadoPago and Gross ProfitIn total USD 1.4 billion was transacted through its payment processer MercadoPago. Gross profit was USD 112 million.
The importance of loans for MercadoLibre sellers
MercadoLibre loans are vital for its sellers who wish to take advantage of the rapid rate of ecommerce growth throughout Latin America.
In a survey of the 3,800 top MercadoLibre sellers, 60% reported that the platform is their only or major sales channel, a large proportion of which have given up their day job and now devote themselves full time to selling there. Over half of sellers work as part of a team of collaborators, with the average size of the team being five. Such teams tend to start as family businesses in which family members are brought in to help. As the businesses aim to expand further the need for working capital increases.
Growing Internet penetration = more potential customers = more working capital needed
The rapid rate of growth is in a large part the result of increasing penetration of the internet through Latin America, though there remains a long way to go. By 2014, 61% of the population of Chile had internet access, 38% of the population of Mexico, and 27% of the population of Paraguay. In many other Latin American countries access is less than 20%.
Over all, expansion is continuing apace. For instance, in Peru and Columbia broadband is being taken to some of the remotest corners of their territories. In Bogota, the capital of Columbia, new fibre optic links have been provided to nearly every town in the country, and Peru is providing Wi-Fi to public buildings in every region of the country. Internet penetration increased from 16% to 50% of the population in just 5 years, and for small business it grew from 7% to 61%.
This rapid technology growth is impacting Latin America in many ways. As more potential buyers come on stream, the market place for MercadoLibre sellers is booming. However, to become a player, at least some capital investment is required, in order to buy new stock and inventory . The problem is that most of the budding entrepreneurs in Latin America don’t have access to the kind of money they need to invest in launching their new MercadoLibre business.
Apart from obtaining finance from their family and friends, the only way to launch their businesses is through a loan, but borrowing money in Latin America isn’t easy, and when it is possible interest rates can be punishingly high. The benchmark interest rate in Argentine currently stands at around 22%, but accessing a loan at those rates is almost impossible for the average citizen.
As an example, in Argentina when people need a loan 45% borrow from their family, 12% from their employer, 12% from savings, and only 3% from a financial institution and just 1% from a private lender. The situation is similar in Mexico where 3% of borrowers obtain loans from a financial institution and 3% from a private lender. In fact, the pattern is similar across all of Latin America.
Putting your MercadoLibre loan to work with MercadoPago
Even though it is expanding rapidly, e-commerce is a very different animal in Latin America from what it is in Europe and the USA. Fears of security risks run at a high level and these fears are the main reason why many would-be shoppers abandon their shopping carts before making a purchase. The only payment sites that are generally trusted are MercadoPago and DineroMail.
Even though MercadoPago is one of the most trusted payment platforms in Latin America, there are some grave misgivings about it. It has been reported that it is susceptible to illegal use including fraudulent sales, bank fraud, money laundering, and unauthorised credit card use. As a result, chargebacks are high. Back in 2006 online traders lost USD 1.2 million from chargebacks from unauthorised credit cards, a staggering 15.8% of net revenues.
Across Latin America, credit card limits tend to be very low, often too low to pay for online purchases. The result is that around half of all internet sales are paid for by instalments. Many use Boleto Bancário, a kind of wire transfer payment process. The customer is sent a filled in bank slip and then then pays it using cash at a local bank branch or supermarket. Even though around 88% of MercadoLibre product listings have the option to pay via MercadoPago, in 2013 less than a third are paid for this way.
Traditionally the fees charged for payment processing by MercadoPago have been high though they were reduced significantly in 2013. Today they are around 6% to 8% of the transaction value, which is still high, especially in a culture that is accustomed to paying by cash, and a significant proportion of the typical MercadoLibre seller’s margin. Fees at that level can be a big competitive disadvantage in a market where margins are small.
Getting a loan – the broken status quo
Getting MercadoLibre loans has never been an easy undertaking. Indeed, as shown above, family members are usually the first port of call when small business owners are in need of some working capital. Institutional alternatives do exist, but are often ineffective, cumbersome and expensive, due to lack of competition and incredibly low standards in the industry.
Billing itself as the provider of instant cash, MercadoCredito specialises in MercadoLibre loans. Specifically, the young startup analyses an applicants transaction history on MercadoLibre in order to assess creditworthiness. Once you have completed the borrower application, and MercadoCredito deems you creditworthy, you will receive the requested funds within 72 hours. Definitely an improvement over the weeks usually taken by the banks.
The bad news for borrowers arrives in the number of fees they have to pay on top of the interest rates and their repayments. Below is an “ideal” example for borrowers:
As you can see, EVERY repayment includes a fee. It is understandable then, that most small business owners shy away from this kind of offer. Being hit with fees, as well as interest rates along with the price fluctuations of your local currency, leaves too much room for fiscal uncertainty for entrepreneurs and startups.
Additionally, MercadoCredito, like a majority of facilitators of MeracadoLibre loans, offers exclusively Spanish support and information. Thus, only-English speakers might want sidestep MercadoCredito and play it safer with a service provider who can offer unlimited support and guidance in English.
Perhaps the most prominent member of the MercadoLibre loans ecosystem is Mr Presta. Much like MercadoCredito, Mr Presta analyses your MercadoLibre selling history to assess your creditworthiness. Interestingly, applicants can be pre-approved in as little as 24 hours, which definitely represents a step up from the long waiting times of the banks.
Worryingly however, applicants cannot themselves apply for the loan that will most likely suit their needs. Instead, Mr Presta pitches your application to their investors, who then, if they agree to give you any working capital at all, propose the interest rates, loan term and commissions payments to you. In short, you can apply for a MercadoLibre loan, but Mr Presta’s investors, will decide how much you get, how long you have to repay, and how high the interest rates and commissions are.
The benefits Bitbond offers for MercadoLibre loans
Bitbond provides loans to MercadoLibre sellers worldwide, including Latin America. These loans enable budding entrepreneurs to buy in stock and take advantage of this rapidly expanding and highly lucrative market. For many, Bitbond is the perfect solution, as no banks are involved, and the only fee is a one time origination fee worth around 1% taken from your loan amount.
An additional benefit of using Bitbond, is there is ample Spanish, English and German support and information. This means that you will never be left wondering if you have important questions around your loan.
As with the other providers, Bitbond allows you to add your Mercado Libre account in order to improve your credit rating.
A registered seller on MercadoLibre has no problem in applying for a Bitbond loan at reasonable interest rates that are considerably lower than those charged by banks. MercadoLibre sellers simply post a loan request on Bitbond, and if investors find it an interesting prospect, they will finance the loan in bitcoins.
Interest Rates on Bitbond start at 7.7% though for potential borrowers who are starting out on MercadoLibre they are likely to be somewhat higher; around 24% would be typical. This is an excellent return for investors, and is also highly attractive to Latin American borrowers. As loans and repayments are tied to the US dollar, they won’t be affected by fluctuating exchange rates or the high levels of inflation to which Latin American counties are prone.
Finally, MercadoLibre now offers bitcoin as a payment option. Sellers will still receive their payments in their local currency, but buyers will be able to pay using the cryptocurrency.
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