Latin American Capital Markets

400 HANNES TAKACS AND KINGA KOFOMAROSCommercial LendingDuring their growth period, most SMEs borrow some amount of funds from a traditionalbank loan source. Commercial banks provide operating lines of credit and lettersof credit, which are usually categorized according to term, expected use, and amountof the loan. The selection and availability of a specific loan depend on the bank's assessmentof the creditworthiness of the applicant and the nature of its industry.Leasing, Factoring, and Government ProgramsWhen a business does not have the collateral or credit history to qualify for traditionaldebt financing, it can utilize alternative debt strategies, such as leasing, factoring,or government/public funding institution programs.Products in Growth FinancingVenture CapitalVenture capital firms are financial intermediaries that collect funds from private or industrialinvestors and allocate these funds to young enterprises with high growth potential.Venture capital firms invest through funds organized as either limited partnershipsin which the venture capital firm is a general partner or independent companies.Often venture capital firms are affiliates or subsidiaries of commercial banks or insurancecompanies. Corporate ventures or direct investors are affiliates of industrialcompanies that make investments congruent with the strategic mission of the parentfirms. Venture capital firms offer advisory services to the companies they invest in toensure and accelerate growth.They usually hold the equity for an average period offive to seven years, depending on the business sector. The ultimate goal of the venturecapital firm is to sell the equity (on the equity market or through a buyout by alarger corporation) and thus generate capital gain. In order to limit their risk, venturecapital firms usually provide financing in stages. Owners of early-stage growing companiesoften have second thoughts about the institutional venture capital industry:they usually welcome the money and management support, but fear the loss of controland restrictions related to the transaction.In the United States, more than 800 venture capital firms provide funding tomore than 2,200 early-stage, growing companies per year. In 1999, venture capital investmentwas distributed among businesses as follows (Sherman 2000):Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub