Obstacles To SME Access To Financing

 

This is not the best of times for our SMEs ( Small and Medium Enterprises) in Nigeria. Most SMEs depends on importation, foreign exchange, Electricity and government spending to survive. The free fall of naira in the Forex market and the single Treasury account have made financing SMEs a big challenge. In midst of all these,  there are many internal obstacles to access  funding which owners of SMEs have to address. If entrepreneurs cannot gain access to finance through the regular system, they may not start up a business or they may simply go out of business, which represents a potential loss to the economy. This will of course worsen unemployment, social ills, youth restiveness, violence, economic and political unrest. But the other danger is that these start-ups would most likely abandon the formal system altogether and operate in the  informal economy, sidestepping taxes and regulations, and thus not making a full contribution to economic growth and job creation. 

 

The difficulties that SMEs encounter when trying to access financing also include:

1. Incomplete range of financial products and services. This difficulty is due to lack of information on both the bank’s and the SME’s side about SME’s. Most SMEs have a poor record keeping culture. This makes it difficult for banks to assess their performance. Banks may avoid providing financing to certain types of SMEs, especially  start- ups and very young firms that typically lack sufficient collateral, or firms whose activities offer the possibilities of high returns but at a substantial risk of loss.  This closes the door for start up entrepreneurs as banks and risk management criteria do not favour them.

 

2. Volatile Growth Pattern

SMEs by their very nature tend to show a far more volatile pattern of growth and earnings, with greater fluctuations, than larger companies. Their survival rate is lower than that of larger companies – one analyst found that manufacturing firms with fewer than 20 employees were five times more likely to fail in a given year than larger firms. Thus, SMEs are at a particularly severe disadvantage when trying to obtain financing relative to larger and more established firms.

 

3. Lack of distinction between the owner and the business

It can also be difficult for potential creditors or investors to distinguish the financial situation of the company from that of its owners. The entrepreneur may have re-mortgaged his or her house to acquire the start-up funds for the company. For example. If there are two cars in the driveway, can one or both be considered part of the company’s assets? If the owner dies, is there someone to take over the business, or will the business end with him or her?

 

4. Lack of Succession Plan.  Most SMEs do not have a succession plan hence prospective lenders are afraid of what the death of their borrower will mean to the business and their money.  Though the SME may have several stakeholders, but again unlike a large company, they are likely to be the friends and family of the SME owner. What happens if one of them decides to take his or her money elsewhere; will the other stakeholders make good on the investment; will they look for a new investor in their own circle, or will they ask the bank for more money?

Extracts from the book:

Entrepreneurial Finance Desk

By CHRIS EGBU CMC,MBA,FCA

08023194131  e-mail : info@centreforproductivity.com