SMEs: Enhancing Access to Funding in a Pandemic

By Timi Olubiyi, Ph.D

Globally, Small and Medium Enterprises (SMEs) are critical to the development of any economy as they possess great potentials for reducing poverty through employment creation and income generation.

This sector also improves innovation, local technology, output diversification, development of indigenous entrepreneurship and forward integration with large-scale industries.

Further to this, in Nigeria, many people work for these SMEs for subsistence. Therefore, the importance of SMEs is well recognized and documented in Nigeria. Regardless of the significant contribution to the economy, SMEs’ survival rate is significantly lower than that of large corporations.

Unfortunately, SMEs in Nigeria have underperformed over the years. However, these SMEs in Nigeria constitute more than 90% of the businesses around, their contribution to the nation’s GDP is below 10% according to recent data.

Empirical evidence shows that finance contributes about 25% to the success of SMEs, and one of the key issues attributed to non-performance is lack of access to funds. Having access to fund gives SMEs the chance to develop their businesses and acquire better technologies for production, therefore, ensuring competitiveness.

However, funding has remained one of the key SME internal issues that confront most enterprises in Nigeria today. SMEs in Nigeria face this gap, and this restricts their economic prosperity.

Consequently, the lack of external funding available for small and medium enterprises (SMEs) is the focus of this article.

Recall, Small and Medium Development Agency of Nigeria (SMEDAN) is the Nigerian government’s institution to develop the SME sector. The agency provides insight into the definition of small businesses based on the number of employees.

The agency defined small and medium enterprises (SME) as a business employing 1 to 200 persons. Therefore, in the context of this article, this definition is relied upon.

Further to this, the SME sector in Nigeria is bedevilled with many challenges. Among these, shortage of finance occupies a very central position, even though the economic and funding importance of the small and medium enterprise (SME) sector is well recognized in academic and policy literature and also evident globally.

Access to funds and financing for these SMEs remains severely constrained, thereby restricting their business growth. For several reasons, large firms may have a comparative advantage over SMEs because of their business structure, credibility in the market and easy access to funding. The limited access to funding by SMEs usually impedes on their productivity and growth.

Evidently, SMEs face credit discrimination from banks because of the opacity of their business information, lack of structure and it is also quite common that these SMEs do not have in place necessary audited financial statements.

For these reasons and more, it is usually difficult for SMEs to show credit quality to banks and other financial institutions. So, SMEs are seen to constantly experience financial constraints, and they experience more stringent credit terms than the large companies, which are seen to be less risky in Nigeria.

Access to finance can give SMEs the chance to develop their businesses seamlessly and acquire better technologies for production, thereby ensuring their competitiveness. However, funding has remained one of the key SME internal issues that keep confronting most enterprises in Nigeria today.

To substantiate this perennial issue, an opinion poll was conducted SMEs in Lagos State- (computer village Ikeja, Alaba international market and some market associations (Auto Spare Parts and Machinery Dealers-ASPAMDA and Balogun Business Association) the findings also revealed one of the main constraints faced by SMEs to be lack of access to finance.

Typically, most of the respondents cited funding and access to finance is the most important constraint. About 79% of small firms cited a lack of finance and access to financing as the main constraint to their business growth. That means only 21% of them have access to required funding for the development of their businesses, and this crucial enabling factor is difficult for SMEs to access.

Consequently, the access to the necessary financing or credit required to expand and continues to perform the business operation, growth, innovation and employment will be affected greatly.

Banks and credit institutions perceive SMEs in Nigeria as risky structures: not very resilient, fragile in terms of activity, solvency and management. Context observation also revealed that many banks do not have specialized products targeted at SMEs, particularly startups and micro-businesses in Nigeria. The absence is due to the banks’ reluctance to lend funds to start-up firms, as it is found that these younger firms’ survival rates are lower than the established large firms.

The opinion poll conducted also indicated that constraints are larger for SMEs in relation to larger firms due to inadequate assets for use as security or collateral. From the opinion poll, it was further gathered that a very high-interest rate is one of the most significant barriers for small businesses to access funding in Nigeria.

SMEs are discouraged from taking loans from banks, as they cannot agree with the loans’ price. Because it will only increase their debt burden, and that can negatively affect the value of the businesses. Other factors discovered that affect the access to finance for SMEs are cumbersome application procedures, short loan maturities, collateral requirements and the novel coronavirus (COVID19), which has drastically changed the lender characteristics, among others.

The COVID-19 has had devastating economic effects on the world, and countries are experiencing a decline in economic output. Majorly, SMEs have been hard hit in Nigeria with their business continuity severely threatened.

The economic impact of the COVID-19 pandemic is very high, and perhaps the government might need to consider more pragmatic palliatives such as social and fiscal policy palliatives targeted at these SMEs for sustainability.

These include providing more low-interest credit facilities and tax breaks- particularly cutting taxes to increase disposable income. Most SMEs run their businesses on loan facilities, and the current situation has impeded their capacity to access or service current loans.

Nigeria’s government needs to continually support this significant sector, given its potential growth and poverty reduction opportunities. Consequently, interventions and policy responses to promote access to finance for these SMEs are recommended. The key recently released guidelines and requirements to access the Central Bank of Nigeria (CBN) announced COVID-19 palliative measures worth N3.5 trillion for businesses, should be relaxed to promote wider eligible participation of SMEs.

Those that truly and meaningfully require it might not be able to access it, especially the micro-businesses and Small firms if the current requirement is not reviewed. Besides, government and regulators may take initiatives to reduce the interest rate for SMEs, which can foster the growth of the SMEs and contribute to the economy and (net) employment creation.

From the aforementioned, it is also apparent that SME operators need to pay adequate attention to the structure of their businesses, adopt good corporate governance, prepare a financial statement when due and keep proper records.

The symmetry of information in the companies will strengthen the capacity to access finance for growth. Where necessary, the engagement of knowledgeable professionals can also make a substantial impact on your business operations and give advice on innovative SME financing.

For instance, the capital market can present opportunities and give alternatives to bank lending. Therefore, to achieve the right type of funding for your business, it might be necessary to seek advice or professional guidance. Good luck!

How may you obtain advice or further information on the article?

Dr Timi Olubiyi is an Entrepreneurship and Small Business Management expert. He is a prolific investment coach, Chartered Member of the Chartered Institute for Securities & Investment (CISI), and a financial literacy specialist. He can be reached on the twitter handle @drtimiolubiyi and via email: drti[email protected], for any questions, reactions, and comments.