Micro, Small and Medium Scale Enterprises (MSMEs) have long since been identified as the primary engine of growth. In Nigeria, according to a 2013 survey by Small and Median Enterprise Development Agency of Nigeria (SMEDAN), in partnership with the Nigerian Bureau of Statistics (NBS), MSMEs contribute to about 48% of Nigeria’s GDP and employ 84% of the country’s labour force. Therefore, achieving meaningful growth in Nigeria is very dependent on being able to support our MSMEs in the face of a challenging economy.
The characteristics of MSMEs, which is to be small and nimble, typically offer numerous advantages such as speed of decision-making, expedited execution capabilities, as well as, adaptability to change amongst others. However, multiple surveys continue to show that MSMEs face significant funding challenges.
MSMEs typically face a variety of challenges which include Financing (e.g. access to credit, short-term funding etc.), degrees of business regulation, protection of property rights, as well as, numerous operational challenges (e.g. Power outages, Logistics, access to transportation etc.).
A lot of these challenges are currently being addressed via various activities of the state and federal government who have introduced policies that are expected to help improve the ease of doing business. The World Bank and other development institutions are also assisting through various intervention programs that are meant to help reduce Nigeria’s infrastructural deficit.
In terms of addressing the core financing needs of MSME’s, Deposit Money Banks (DMBs) have long been identified as a critical partner and have developed tailor made solutions that can help mitigate some of the cash flow challenges faced by MSMEs. A brief overview of some of these challenges and solutions available to MSMEs are as follows;
Access to Credit:
When compared to large corporation and national governments, MSMEs often face more challenging terms and conditions before they are able to secure finance from financial institutions.
The Nigerian banking sector is well aware of these challenges. As a result, banks are active participants in the CBN’s Micro, Small and Medium Enterprises development fund which has up to N220 billion for intervention in MSMEs at a single digit rate of 9%.
Sudden and abrupt shortage of operating cash
All MSMEs will at some stage experience situations when unanticipated expenditures will arise. Such as the need to replace a critical business equipment which is required to complete a very profitable job.
To alleviate this challenge, Nigerian Banking institutions offer a variety of flexible products which includes overdrafts, equipment loans, working capital finance, distributor finance etc. Additionally, Nigerian banks also offer dedicated business current accounts for SMEs which have low account maintenance charges to reduce burden on SMEs.
Delays in payment from debtors
This is a frequent dilemma faced by MSMEs whereby a sustainable and thriving business has sold goods to a customer but is yet to be paid for that transaction. Consequently, this creates potential cash flow challenges for the MSME as they face difficulties with meeting up other obligations or replace its stock of goods.
Notably, within the Nigerian Banking sector, there are dedicated short term products to alleviate this challenge. Specifically, a number of Nigerian Banks offer invoice discounting facilities (e.g. First Bank, Union Bank, Keystone Bank). Additionally, letters of credit facilities also exist (GT Bank, Access Bank, Unity Bank, Wema Bank, Zenith Bank, Union Bank and Keystone Bank)
Stock Turnover (either too slow or too fast)
The challenge here is that MSMEs occasionally experience sales fluctuation which translate to higher inventory requirements with associated need to increase storage. As an example, you have a sudden growth in sales which means you have to buy more goods to meet up with demand, these goods have to be stored somewhere.
From a Nigerian banking perspective, dedicated products also exist to mitigate this challenge. We previously noted the distributor finance, as well as, working capital finance. However, there are additional products on offer such as Stanbic IBTC’s commercial real estate product which can be used for Warehouse Financing or UBA’s financing for Storage Facilities.
Inadequate planning and cash flow projections:
As discussed earlier, MSMEs also face challenges caused by external factors. However, it needs to be said that occasionally the MSMEs can do more to plan in advance for these challenges. This involves ensuring adequate record keeping and business planning. Whilst this may not be the forte of MSMEs, record keeping and business planning are critical requirements for success in any business venture.
Interestingly, as the Nigerian banking sector increasingly aligns with MSMEs this deficiency is also being addressed by some deposit money banks creating dedicated advisory units to assist MSMEs with record keeping and business planning. Fidelity Bank’s Managed SME program is an example of advisory service being deployed within the Nigerian Banking sector. First Bank’s SME Connect and Heritage Bank’s SME Support Services are additional examples of banks offering small business advisory services.
Cash flow challenges are synonymous with most businesses including MSME’s. However, by utilizing some of the solutions proffered by DMBs, MSMEs are better equipped to remain manage their cash flows more efficiently.
Article written on behalf of Bankers Committee of Nigeria. This is the third article in a series focused on raising awareness around Nigerian banks’ efforts and most importantly educating the public on opportunities available to them to foster their active participation in our nation’s diversification efforts.