Objective statistics shows that SMEs are over 90 per cent of the businesses in Nigeria and they contribute up to 45 per cent of GDP. This is despite being underfunded and unstructured.
When you consider that the current value being derived from SMEs is substantial despite the fact that most of them are subsistence/micro businesses, then you can begin to imagine how big this opportunity will become if they scaled up just one level.
The biggest challenge in terms of financing SMEs in the country is the fact that SMEs do not have the ability to scale to an extent where bank debt will make a meaningful impact. This prevails because of lack of proper financial education of SME operators, Lack of good corporate governance and business structure and Lack of access to equity – our markets for equity is not very developed.
A few SMEs recognize the challenge, whilst many of them believe that the banks should solve their problems, this is mostly because they do not understand that the nature of bank loans do not accommodate an appetite for funding start-ups or for giving loans that behave like equity. Despite increased attention and support for SMEs by banks and the CBN, most SMEs out there still have this perception that the banking industry is not favourably disposed to SMEs. In other to correct this impression, SMEs need constant education on how the economy runs. If the banks lower their appetite for risk and fund the businesses with poor structure and governance, the loans will go bad, shareholders’ funds will be eroded, and the cycle will hurt SMEs even more.
There are however alternative solutions for SMEs which can be facilitated by banks or any other stakeholder in SME ventures. SMEs can be assisted through business trainings/capacity building programs, business incubator can be set up to cater for handholding businesses, a mentoring platform can be created for entrepreneurs so as to open them up to business best practices as well as provide market access.
In addition to the above, there is however still a need to work at developing alternative sources of funding apart from commercial bank debts. Banks collaborating to set up various pockets of SME entrepreneurship funds might help meet the need for patient capital which commercial bank debts can then ride on.
In the interim, start-ups and SMEs in general can take advantage of intervention funds such as the You-Win initiative and other government driven funding opportunities.