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Trends In SME Financing

Trends In SME Financing

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SMEs makeup 90% of businesses in the world and thus, are responsible for 50% of the world’s employment. Despite these statistics, the IFC estimates that 40% of MSMEs in developing countries have unmet financing needs in the tune of $5.2trilion annually. More specifically, Sub-Saharan Africa has a financing Gap of $245bilion, and the MSME financing gap as a percentage of GDP in Nigeria is estimated at 45%.

Recent trends in SME financing include:

  • The Nigerian government actively laying out policies aimed at driving SME access to finance through traditional banks. In July 2019, the Central bank gave directives mandating Deposit Money Banks to increase Loan to Deposit Ratio to 60% in order to spur growth in the real sector.  As a follow up, in October 2019, the Apex bank increased the requirement to 65% with compliance to be attained by December 2019. The directive was issued to maintain the increasing momentum of credit levels in the sector.  
  • Outside government intervention, we have seen SMEs seek to access financing through the use of alternative instruments. The evolution of financial technology has provided a plethora of financing sources outside straight debt or equity. Peer-to-Peer lending and platforms that provide financing to SMEs have witnessed a boom, and whilst the interest rates offered are not better than those obtained from the traditional banks, a large number of SMEs access financing through this model and thus, tend to gravitate to these kinds of providers of capital.
  • In Nigeria, we have seen more SMEs raise capital from Venture Capital and Private Equity firms focused on early growth stages to expand their business. So far in 2019, we have had 30 Venture Capital and Private Equity deals resulting in a cumulative raise of $ 1,853.2‬ million excluding undisclosed raise amounts. 
  • Although there are several financing sources, many SMEs still rely on bootstrapping or putting together funds from friends and family (love money) to finance their activities.  

Some financing sources that exist include:

Equity InstrumentDebt InstrumentHybrid InstrumentsAsset-Backed Instrument
Angel financingUnsecured loansParticipating loansPurchase order financing
Venture Capital (VC)Secured loansProfit share participationAsset-backed lending
Private EquityPeer-to-peer lendingMezzanine financingDiscounting & Factoring
CrowdfundingCorporate BondsConvertible BondsLeasing

The table shows sources through which SMEs can finance their activities.

Access to financing is one of the top 5 growth constraints to SMEs globally. There is still a large financing gap for SMEs worldwide. We have seen in recent times, multilateral organisations and governments actively work to bridge the SME financing gap.

The reason for the financing gaps could be viewed from a demand side (receivers of capital) and supply side (providers of capital) perspective. 

Demand Side

  1. Lack of awareness of the available programmes created to finance SMEs.
  2. Lack of financial skills and knowledge.
  3. Negative perception of approaching traditional banks for financing.
  4. Inability to access financing from traditional and alternative providers of capital as a result of incomplete or insufficient data to assess the activities of the business.
  5. Disadvantageous tax treatment of investment through equity or equity related instruments.

Supply Side

  1. Barriers to entry in the SME market brought on by limited regulatory frameworks and oversight.
  2. Blurred view of the SME market brought on by insufficient data and research. In cases where research and tests have been undertaken, there is insufficient information on the outcomes of the work done.
  3. Disadvantageous tax treatment of investment through equity or equity related instruments.
  4. Limited exit opportunities.

Co-Creation HUB is at the forefront of providing support to the demand side and supply side of capital, working with entrepreneurs leveraging technology to solve problems in their communities and across the continent. Through its many programs, Pre-incubation, Incubation, Acceleration and many other partnership programs, SMEs and start-ups are provided with the relevant framework, skills and knowledge required to de-risk their business and position themselves for external financing.  Through many programs, entrepreneurs have received capital to create solutions and build products from ideation to ‘Minimum Viable Product’ and scale these products to several markets.

Growth Capital by CcHUB, the VC arm of CcHUB, invests in early stage growth companies. Through its co-investment model, it has been able to mobilize capital for social entrepreneurs leveraging technology to bridge the gaps that exist in public and private infrastructure across the country. It has made investments in the healthcare and wellness, education, fintech, retail & logistics and the consumer technology vertical.

As government, multilateral agencies and the private sector continues to dedicate resources towards bridging the access to financing gap for SMEs, we anticipate a narrowing of the financing gap driven largely by the global financial inclusion agenda, proliferation of fintech companies solving the SME and consumer credit challenges, and partnership between the private sector and the government to fill the entrepreneurial skill and knowledge gap in the country and on the continent.

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