Access to finance remains one of the major challenges facing Small and Medium Enterprises (SMEs) in Nigeria. However, there are strategies that SMEs can adopt to improve access to affordable credit and funding to grow their businesses. This article explores five key strategies:
Leverage government SME support schemes and intervention funds.
The Nigerian government, through various agencies and initiatives, provides support schemes and intervention funds targeted at helping SMEs gain access to affordable finance. SMEs should take advantage of these opportunities.
Some government schemes and funds include:
- The Central Bank of Nigeria SME Credit Guarantee Scheme provides guarantees to banks for up to 80% of SME loans to encourage lending. SMEs can access up to ₦500 million with a 5-year tenure and 9% interest rate.
- The Development Bank of Nigeria offers financing products for SMEs like term loans, working capital loans, equipment loans, etc. with concessionary rates.
- Bank of Industry Funds: BOI manages various government intervention funds like the SME Fund, Cottage Agro Processing Fund, Nigerian Content Intervention Fund, etc. that provide affordable financing for SMEs.
- The Agric, Small, and Medium Enterprise Scheme (AGSMEIS) helps provide concessionary financing for agricultural and SME projects.
- State SME Agencies Funds: Many states have SME agencies that manage funding schemes that SMEs can apply for.
SMEs should research all available government funding options and their criteria to access affordable financing.
Build a strong track record and financial history.
Having a strong financial history and track record of business success makes it easier to secure financing from lenders and investors. SMEs should:
- Maintain proper financial records and bookkeeping.
- Have audited financial statements and tax clearance histories.
- Build a good credit history by taking and repaying loans on time.
- Show consistent revenue and profitability trends.
- Have detailed business plans and projections.
This demonstrates the SME is creditworthy, responsible, and able to repay loans.
Explore alternative financing options.
Apart from traditional bank lending, SMEs can leverage alternative financing options like:
- Crowdfunding platforms allow for raising smaller investments from a large number of individuals. Sites like StartCredits and ThriveAgric connect SMEs with investors.
- Peer-to-peer lending Direct loan marketplaces like Lendbox, Mintos, and Lubobillions connect lenders and SME borrowers.
- Invoice factoring: getting financing against outstanding invoices Sites like Mono and FlexFinance offer this.
- Supply chain financing: getting finance by leveraging payments owed by larger buyers or retailers.
- Grants and seed funding: applying for grants from donors, foundations, and impact investors
- Revenue-based financing: get funding in exchange for sharing future revenue.
Diversifying financing sources spreads risk and provides more options.
Leverage Fintech Innovations and Digital Lending
Financial technology innovations are increasing SME lending. Nigerian fintechs like Paylater, Aella Credit, Carbon, Fairmoney, etc. use alternative credit scoring models and provide quick short-term loans.
SMEs can adopt digital lending by:
- Checking eligibility for fintech loans based on transaction history data
- Taking small loans to build a digital credit profile and access bigger loans.
- Providing bank account statements for faster decision-making.
- Choosing flexible repayment plans
- Downloading lending apps and exploring options.
Digital lending presents new opportunities for SME finance.
Form strategic partnerships and alliances.
Partnering with larger companies in the value chain as well as development agencies can facilitate access to credit.
Some options include:
- Supply chain financing partnerships Partner with large buyers who can provide financing or connect to lenders in return for supply commitments.
- Bank alliances: banks partner with organisations to lend to their SME networks. Partnerships provide bank access and lower rates.
- Agency matchmaking: development agencies match lenders and SMEs along value chains they support and de-risk lending.
- Private equity investments: PE firms provide growth capital in exchange for equity stakes in promising SMEs.
- Corporate venture capital: strategic investments from large corporations into innovative SMEs providing synergistic solutions
Partnerships and alliances that provide “smart”money”—money plus value-added services—can unlock growth.
Adopt good financial management practices.
Building the internal capacity to manage company finances better also enables access to finance.
- Institute strong corporate governance procedures and financial controls.
- Adopt international accounting standards and best practices.
- Utilise professional accountants and qualified CFOs.
- Leverage digital tools for accounting, payments, inventory, etc.
- Implement robust budgeting, cash flow projection, and management.
- Track financial KPIs and ratios to gain insights.
- Conduct audits and ensure transparency in finances.
Good financial hygiene reduces risk for financiers. Matching financing terms to cash conversion cycles also improves working capital.
Accessing adequate and affordable finance remains challenging for many Nigerian SMEs, given the limitations of traditional lending. However, SMEs can improve their funding prospects by leveraging government support programmes, building strong financial track records, adopting alternative financing options like fintech lending, forming strategic win-win partnerships and alliances, and instituting sound financial management practices. This expands fundraising options, reduces costs, and unlocks growth opportunities. The strategies outlined provide an actionable blueprint for Nigerian SMEs to surmount financing hurdles.