Small businesses drive Latin America’s economy—99% of companies are classified as micro, small, or medium-sized enterprises (MSMEs) and concentrate 81% of all employment—yet they face structural obstacles that limit growth, competitiveness, and survival. Understanding these challenges and implementing targeted solutions is critical for entrepreneurs seeking to build sustainable businesses in the region.
Challenge 1: Access to Financing and the $1 Trillion Credit Gap
The most pressing challenge facing Latin American SMEs is access to affordable capital. Nine out of every ten small and medium-sized enterprises are currently underserved, with banks and fintechs combined addressing only 13% of the potential demand estimated at $1.4 trillion. One in three SMEs in the region report restrictions in accessing credit, while 20% identify lack of access to financing as a major limitation to their growth.
Traditional banks have historically avoided lending to small businesses due to perceived high risk, particularly for enterprises operating in informal sectors where creditworthiness is difficult to assess. This forces many entrepreneurs to turn to predatory informal lending at interest rates exceeding 50-100% annually, making growth financially impossible. Additionally, collateral requirements remain prohibitively high—in El Salvador, lenders require collateral valued at 205% of the loan amount, creating a 54% credit denial rate.
Solutions to Overcome Financing Challenges:
Fintech Alternative Lending: New fintech platforms are revolutionizing SME access to capital by using alternative credit scoring methods. Rather than requiring traditional collateral or extensive financial documentation, fintech companies analyze customer transaction data, payment histories, and digital footprints to assess creditworthiness. Companies like Nubank, Komodo, and Kapital now serve millions of underbanked SMEs across the region with AI-powered credit decisions delivered within hours instead of weeks.
Crowdlending and Peer-to-Peer Lending Platforms: Crowdlending platforms connect entrepreneurs with small investors willing to lend directly. Research in Peru shows that MSMEs perceive crowdlending as offering lower financial costs, flexible credit conditions, and faster approval processes compared to traditional banking. Platforms operating across Latin America allow entrepreneurs to access capital while investors receive attractive returns, bypassing traditional banking intermediaries entirely.
Government Support Programs: Many Latin American governments have implemented SME financing initiatives. Peru’s FAE-MYPE program provides working capital to micro and small enterprises, while Brazil’s Reactivate program demonstrated how targeted government intervention can reach hundreds of thousands of SMEs. Research government programs in your country, as eligibility criteria are often simpler for small businesses than traditional bank requirements.
Supplier Financing and Microfinance: Traditional microfinance institutions still serve millions of entrepreneurs, particularly in rural areas. While interest rates are higher than bank loans, repayment terms are more flexible and collateral requirements are minimal. Additionally, negotiating extended payment terms with suppliers provides working capital without external borrowing.
Challenge 2: High Regulatory Burden and Complexity
Latin American SMEs face an exhausting regulatory landscape characterized by complex procedures, high compliance costs, and fragmented requirements across federal, state, and municipal levels. Colombia, Mexico, Bolivia, Brazil, Peru, Argentina, and Paraguay all rank in the top 20 most complex jurisdictions globally for business operations. In Mexico alone, 63% of small businesses operate informally specifically to avoid regulatory compliance burden.
The issue is compounded by the requirement that many procedures must be completed in person, consuming time that entrepreneurs cannot spare from core business activities. Additionally, obtaining Federal Taxpayer Registration (RFC) in Mexico, tax identification numbers in Brazil, and similar foundational registrations often requires multiple visits to government offices with inconsistent requirements.
Solutions to Overcome Regulatory Challenges:
Digital Government Transformation: Leading countries in the region are digitizing business registration and tax compliance. Brazil’s Gov.br consolidated thousands of government services into a single digital portal, while Chile’s digital identity system (CURP) has streamlined access to public services dramatically. As governments continue this digitization process, entrepreneurs should proactively use these platforms to reduce compliance burden. Setting calendar reminders for tax deadlines and using government digital portals prevents penalties while saving time.
Simplify and Formalize Gradually: Rather than attempting full formal registration immediately, many entrepreneurs can benefit from registering incrementally. Start with basic business registration, then gradually add tax registration and other requirements as your business grows. Understanding that formalization provides access to banking, credit, government services, and customer confidence makes the compliance burden worthwhile. The key is recognizing that the perceived value proposition for formalization improves as your business scales.
Business Associations and Chambers of Commerce: Industry-specific chambers of commerce and business associations provide advocacy, guidance, and collective solutions to regulatory challenges. Organizations like Peru’s chambers, Colombia’s trade associations, and Mexico’s business groups offer members practical guidance on compliance, advocacy on behalf of their interests, and access to government relationships that streamline procedures. Membership fees are typically reasonable relative to the compliance support provided.
Professional Advisors: Hiring a local accountant or business consultant specializing in SME compliance is often more cost-effective than managing regulatory burden alone. These professionals maintain current knowledge of changing requirements, help optimize tax positions legally, and ensure compliance that prevents costly penalties. Many accountants offer fixed-fee packages for small businesses, making professional support affordable.
Challenge 3: Limited Management Capabilities and Business Skills
Many Latin American entrepreneurs have strong technical or product expertise but lack formal training in financial management, marketing, operations, and strategic planning. Research examining 2,660 SMEs across 13 Latin American countries found that lack of business management capabilities significantly constrains growth and sustainability. This capability gap is particularly acute among microenterprises where 90% of businesses in some countries are single-owner operations lacking professional management structures.
Solutions for Building Management Capabilities:
Entrepreneurship Training Programs: Organizations across Latin America provide accessible business training. The ICC Centre of Entrepreneurship operates networks in Bogotá, Buenos Aires, and Guadalajara offering comprehensive courses in business planning, financial management, and cross-border trade. Similarly, programs like Avanzando Juntas provide Spanish-language training coupled with mentorship and seed capital access specifically for entrepreneurs. These programs typically cost $300-1,000 and deliver transformational education.
Online Learning Platforms: ConnectAmericas, VC4A, and other platforms offer free and low-cost online courses in financial management, digital marketing, and business fundamentals specifically designed for Latin American entrepreneurs. These self-paced courses allow entrepreneurs to learn while maintaining their business operations. Investing 5-10 hours weekly in targeted learning compounds dramatically over months and years.
Mentorship Networks: Connecting with experienced entrepreneurs through chambers of commerce, business associations, or informal networks provides access to practical guidance without cost. Experienced business owners have encountered similar challenges and can provide real-world solutions. Many successful entrepreneurs view mentorship as a way to give back to their communities.
Business Planning Tools: Developing a formal business plan forces clarification of strategy, financial projections, and operational requirements. Free tools and templates available through government agencies and nonprofit organizations guide entrepreneurs through business planning systematically. A solid business plan becomes invaluable when seeking financing, attracting partners, or navigating expansion.
Challenge 4: Limited Technology Adoption and Digital Skills Gap
While Latin America is rapidly adopting digital technologies, many SMEs lag significantly in technology adoption. Research examining 306 SME executives across six Latin American countries revealed that 40% cite high implementation costs as a barrier to technology adoption, while 38% struggle with lack of skilled personnel to implement and manage new systems. Additionally, gaps between internet access (over 90% in most countries) and actual productive technology use persist—while over 90% of businesses have internet, only 34% in Peru utilize electronic banking despite having access.
Cybersecurity threats are also escalating dramatically, with Latin America experiencing 39% more cyberattacks weekly than the global average, affecting organizations across all sectors. Ransom extortion, data-stealing malware, and phishing scams targeting Microsoft, Google, and Apple credentials are particularly common. SMEs lack resources to deploy sophisticated defenses, making them increasingly vulnerable.
Solutions for Technology Adoption:
Start with Low-Cost Digital Tools: Modern SMEs need not make massive technology investments. Free and low-cost tools address most common business needs: email marketing (Mailchimp), project management (Trello), accounting (Wave), customer relationship management (HubSpot CRM), and communication (Zoom). Starting with one or two critical tools and gradually expanding prevents overwhelm while building digital capabilities progressively.
Cloud-Based Solutions: Cloud-based software eliminates expensive server infrastructure and IT staff requirements. Accounting, inventory management, point-of-sale, and customer management systems are now available through affordable monthly subscriptions accessible to businesses of any size. This democratizes technology access that was previously available only to large enterprises.
Digital Skills Training: Organizations specializing in SME support provide focused digital training for entrepreneurs and their teams. Government digitalization initiatives often include free training on using digital platforms and tools. Prioritize training on tools that directly address your most painful business challenge—if cash flow is your biggest problem, prioritize accounting software training.
Cybersecurity Fundamentals: The GCA Cybersecurity Toolkit for Small Business, available free in Spanish and Portuguese, provides easy-to-implement tools that prevent 86% of ransomware techniques and common cyberattacks. Essential practices include requiring strong passwords, enabling two-factor authentication, regular software updates, employee security training, and data backups. These fundamentals cost nothing but dramatically reduce breach risk.
Challenge 5: Informality and Limited Access to Digital Economy
Approximately 33% of Latin American GDP originates in the informal economy, with 42% of Latin Americans living in households fully dependent on informal labor. In Mexico, 63% of small businesses operate informally, while in many Central American countries, informal businesses represent nearly 50% of GDP. While informality provides employment and operational freedom, it creates a fundamental trap: informal businesses cannot access banking, capital, government services, or legitimate digital platforms, limiting growth and leaving them vulnerable to exploitation.
The perceived value proposition for formalization is weak—entrepreneurs see high costs (business licenses, permits, financial services, taxes) without clear immediate benefits. Additionally, many informal entrepreneurs fear the monitoring and accountability that formalization brings, particularly if they’ve been operating without full tax compliance.
Solutions for Formalization:
Understand Formalization Benefits: Formalization demonstrably increases sales, profitability, access to credit, and business stability. Research shows businesses that transition to formal status experience significant revenue increases and improved customer confidence. Recognizing that an initial investment in formalization generates long-term competitive advantages and access shifts perspective from cost to investment.
Pursue Preferential Tax Regimes: Many Latin American countries offer simplified, preferential tax rates specifically for micro and small businesses during their early years. Rather than full tax burden, new formal businesses might pay a “symbolic” tax rate, graduating to normal rates only after achieving sustainable profitability. These regimes make formalization immediately affordable for small entrepreneurs.
Digitalize Registration: Governments increasingly allow business registration, tax enrollment, and document submission entirely through smartphones and digital platforms. Peru’s digital government initiatives, Mexico’s online tax registration, and Brazil’s digital platform have dramatically reduced time and complexity required for formalization. These digital pathways make formalization accessible even for entrepreneurs with limited time.
Access Formalization Services: Organizations supporting SME formalization—government agencies, chambers of commerce, NGOs—provide guidance through the formalization process. Many offer group formalization programs where entrepreneurs complete registration together, reducing administrative burden and cost. The investment in professional guidance often pays for itself through optimized tax planning and avoided compliance penalties.
Challenge 6: Weak Supply Chain and Market Access
Latin American SMEs often struggle to connect with reliable suppliers, maintain consistent quality, and access broader markets beyond their immediate geographic region. Geographic dispersion, infrastructure limitations, and limited market information create barriers to participation in regional or international supply chains. Additionally, many SMEs lack certifications or quality standards required to compete for larger contracts or export.
Solutions for Supply Chain and Market Access:
Digital Marketplace Platforms: E-commerce platforms like Mercado Libre connect SMEs with millions of customers across the region. The platform has supported 574,000 SMEs, enabling them to reach national and regional markets from a single digital storefront. Digital marketplaces eliminate geography as a barrier—a business in rural Peru can now sell to customers throughout the region.
Government Trade Support: Many Latin American governments operate export promotion agencies and provide training in international trade. These agencies maintain buyer networks, organize trade missions, and provide market research and certifications required for exports. Participating businesses gain access to international buyers and opportunities that would be prohibitively expensive to pursue independently.
Business Networks and Associations: Industry-specific associations connect SMEs with complementary businesses for collaboration and referrals. Rather than competing solely individually, participation in networks enables collective marketing, shared supplier relationships, and group purchasing discounts.
Challenge 7: Political and Economic Instability
Latin America’s regulatory environment is affected by political changes, elections, and geopolitical shifts that create uncertainty. 60% of business leaders report that political risk is difficult for international companies to mitigate in the region. Recent tariff implementation, currency fluctuations, and shifting trade policies have created additional uncertainty impacting SME planning and investment decisions.
Solutions for Managing Political Risk:
Diversify Revenue Sources: Rather than depending on a single market, customer, or product, develop multiple revenue streams and serve customers across different regions. This geographic and customer diversification reduces vulnerability to localized economic shocks or policy changes.
Build Flexible Operations: Maintain operational flexibility that allows rapid adjustment to changing conditions. This might mean maintaining multiple supplier relationships, cross-training employees, or designing product/service offerings adaptable to different market conditions.
Network and Stay Informed: Participation in business associations, chambers of commerce, and entrepreneur networks provides early warning about policy changes affecting your sector. Business leaders in these networks share information and collectively advocate for beneficial policies.
Conclusion
Latin American SMEs face substantial structural challenges—financing gaps, regulatory burden, management capability gaps, technology adoption barriers, informality, supply chain limitations, and political uncertainty. However, each challenge has proven solutions demonstrated by successful entrepreneurs and supported by growing ecosystems of fintech platforms, government programs, business associations, and online resources.
Success requires acknowledging these challenges are not unique personal failures but regional realities affecting millions of entrepreneurs. Prioritize the two or three challenges most impacting your business, implement targeted solutions from proven programs and resources, and incrementally build capabilities and infrastructure that enable growth. The entrepreneurs building thriving businesses in Latin America are not those who avoid these challenges—they are those who systematically address them with available resources and persist through inevitable setbacks.