Funding has remained one of the key internal issues that confront most enterprises in Nigeria particularly Micro Small Medium-sized Enterprises (MSMEs).
Dr Timi Olubiyi, an entrepreneurship and business management expert said, “SMEs are important actors in economic growth and transformation, creating positive value for the economy and contributing towards sustainable and balanced economic growth, employment and social stability.
“However, SMEs often face limited access to financing due in part to the relatively higher risks associated with investing in them. The SME financing challenge has been exacerbated following the introduction of significant financial regulatory reforms in the aftermath of the global financial crisis, heightening banks’ risk aversion when extending loans.”
He noted that, there are other alternatives in sourcing for finance for SMEs, which are unaware to most SME owners, saying, one of such alternative is the private debt market where fund managers provide finance to private businesses seeking credit.
He pointed out that, SMEs owners are not aware of private debt as a funding option, how to access it, and its benefits and risks. This problem is compounded as fund managers cannot easily identify businesses that require funding, and therefore rely on potential borrowers to approach them.
Understanding Debt Market
From a corporate point of view, debt market is the broad market for companies looking to raise funds through debt issuances. The debt market encompasses both investment-grade bonds, as well as short term commercial paper.
Importance Of Finance To SMEs
According to Olubiyi, these businesses face financing gap arising from lack of access to capital, which restricts their economic prosperity. World over, he said, business operators primarily depend on bank loans or government schemes for financing, adding that, access to finance can give SMEs the chance to develop their businesses and acquire better technologies for production, therefore, ensuring their competitiveness.
Challenges SMEs Face When Sourcing Funds
For several reasons, he pointed out, large firms may have a comparative advantage over SMEs because of their business structure, credibility in the market and easy access to funding. And because of lack of the aforementioned traits in most small businesses, he stressed that, banks and credit institutions perceive SMEs in Nigeria as risky structures: not very resilient, fragile in terms of activity, solvency and management.
Further to this, he disclosed that, most SMEs operate informally and do not have in place 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,” he pointed out.
The economic impact of the COVID-19, according to him, is very high, and perhaps the government might need to consider more pragmatic palliatives such as social and fiscal policy palliatives targeted at SMEs. These, he stated, could include providing more low-interest credit facilities and tax breaks- particularly cutting taxes to increase disposable income.
“However, for SME operators to easily access funds through the debt market, as well as commercial banks and government financial institutions, adequate attention needs to be paid to the structure of their businesses. They need to adopt good corporate governance, prepare financial statement as and when due and keep proper records. The symmetry of information in the companies will strengthen the capacity to access finance for growth,” he said.
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