Dada Adefolami

By Dada Adefolami

The Central Bank of Nigeria defines small and medium enterprises in Nigeria according to asset base and number of staff employed. The criteria are an asset base equal or less than N5 million, and a staff strength equal or less than 100 employees.

The role small and medium enterprises play in the development of country is very important. SMEs have greatly contributed to the Nigerian development in terms of employment, growth and development, and marketing of goods and services The Nigerian Government is turning to small and medium scale industries and entrepreneurs as a means of developing the economy and solving problems. A great percentage of all registered companies in Nigeria are constituted by small scale industries and they have been in existence for a long time.

According to the United Nations Industrial Development Organization (UNIDO), developing countries can conquer poverty and inequality by democratizing, deregulating, and liberalizing the integration of global economy. Recent studies have shown that SMEs contribute to over 55% of GDP and over 65% of total employment in high income countries also that SMEs and informal enterprises account for over 60% of GDP and over 70%of total employment in middle income countries (OECD, 2004).

SMEs are important role players in contributing to the transition of agriculture led economies to industrial ones in Nigeria, SMEs help in the absorption of productive resources at all levels of the economy and contribute to the building of flexible economic system in which small and large firms are interlinked.

SMEs are responsible for the growing forces of the largest growing economy China in terms of national GDP contribution which amount up to 60% diversification of product, scale of assets and creation of employment.

A lot of people rely on the small and medium enterprises either directly or indirectly. Social income distribution, employment and tax revenue, adequate utilization of resources and stable

The ability of SMEs to raise credit at banks is enabling, but many still depend on short-term sources of finance. The good news is the number of funding alternatives is growing

During the credit crunch, global recession and Nigeria banking meltdown it became, unsurprisingly, extremely difficult for SMEs to raise either loan or equity finance. There are positive signs that the situation has improved in most all the state and is about to get even better.

According to a recent cross-border study Credit constraints and growth – the financial position of companies improved, with the percentage of SMEs that were credit constrained sharing over the period past.

But there are issues that cause concern. SMEs remain over-dependent on short-term sources of finance, particularly overdrafts. While larger and more established SMEs have access to a wider variety of types of finance, smaller and younger firms have less choice.

Smallbusinesses face a number ofchallenges. From the startup phase to maintaining the business to growing the business, entrepreneurs need to constantly face a number ofchallenges, some of which are unique to smallbusinesses. Foremost of course of these challenges is ensuring that the business survives.

The biggest challenge for SMEs seeking to raise growth finance is to find the most appropriate type of funding for the investment or the life-cycle of the business, for younger firms a lack of assets means that risk capital measures can be critically important. Much smaller group of businesses remain in simple, if easing, difficulty and that is those businesses who purchased property. Certainly, the study found that property debt projection continues to be a problem for many businesses in most of the countries even in advance nations.

Improvement
In addition to government improve SMEs can launched its Funding for Growth Advisory Service to check and moderate the progress, for SMEs in both the State and the federation at large. This will be aimed at supporting and growing small firms by improving their access to alternative sources of finance.

The service to set up in response to an identified need and recognizes that SMEs require assistance to find and access funding alternatives, enable to marker them to practical funding options that best suit their business requirements. With the improvement in the economy, there are now a lot more funding for growth options available to local SMEs, including private equity, trade credit, peer-to-peer lending and mezzanine finance.

Without spending a huge amount of time researching the different options, it is difficult to know just how to access the money and which best suits specific business objectives, as a result SMEs will have continued to resort to tried-and-tested avenues that may be less economically advantageous.

Most finance is from CBN debt, which means there is an improved approach from the banks towards lending to small firms, which has been achieved by persuading the banks to focus on cash flow and business potential, rather than just the state of the balance sheets, which may still be burdened with debt and past losses. The banks themselves are now well financed for lending’ following CBN recapitalization exercises.

The challenge is to improve equity financing of small firms, rather than relying on debt. There are still concerns by small firms about losing control. One approach is through the issuing of preferential, redeemable, shares, which can be bought back. the Employment Incentive and Investment Scheme –with provides tax relief for investment in qualifying SME shares – is important, need to be made more attractive to invest in businesses rather than property or listed shares, and the need to introduces crowdfunding for small firms.

The funding countryside has expanded, with greater diversity., bank funding is once again increasing, although in the context of a more measured appetite for risk among banks; nevertheless, this source of credit will always play an important role in supporting SMEs.

However, with important lessons learned over the last decade, ambitious management teams also recognize the advantages of de-risking by diversifying their funding sources. ‘Even before the credit crunch and the recession, SMEs often found it difficult to source suitable development and growth capital; meaning that while accruing bank debt was the chosen route in many cases, it perhaps wasn’t the most suitable way to facilitate growth. Against this backdrop, alternative funding sources have become more prominent and are likely to play a key role in both the funding of and scaling-up of indigenous SMEs with a strong export offering.’

One of those new alternative funding sources is the BDO Development Capital Fund, launched last year. The offering of development and growth capital for SMEs, which invests by government and operates by Bank of industries and other. The fund draws on expertise from the CBN and leading businesses, they bring to the table a track record of successful internationalization; an intimate knowledge of overseas markets; and networks on the ground that can assist Nigeria companies successfully develop in new markets.

The era of 1980s can be said to be golden years of SMEs in Nigeria. Those were the years of the Nigerian Industrial Development Bank Ltd (NIDB) and the Nigerian Bank for Commerce and Industry (NBCI). They were Federal Government Development Banks specifically dedicated to the development of SMEs in the country.

Finally: Government Role
SMEs were identified as a key target for the government growth and change ofprogram emphasis.

What we have seen is a significant increase in the level of funding available in the market. Banks are back in the market, so SMEs with good credit standing are able to borrow. Alternative lending has led to greater availability of funds, predominantly in the mid corporate sector in Nigeria for funding of SMEs.

Where there is still a lack of funding available is probably at the micro or smaller end of SMEs. is still challenging, because the level of earnings is lower and more volatile and it is more domestic economy based. The reality is that a lot of them are already over-leveraged and extra debt may not be the answer, and they need more stable forms of capital – most likely equity.

It is necessary for SMEs to think differently when it comes to raising finance. ‘from the experience of dealing with SMEs, there is not a huge amount of frustrated demand. ‘Rather than borrowing to grow, it is now built into the essence to finance growth from retained earnings, instead of going out to look for new funding.’

There are sectors of the economy today that are booming: exporting, Farming and innovating etc. If you are in those categories, you are likely to have no problem borrowing. But that does not cover the clear majority of SMEs.

The Small and Medium Enterprises Development Agency of Nigeria(SMEDAN) has provision in the 2017 capital budget appropriation for the execution of Social safety and Empowerment Projects in various locations across Nigeria.

Around the world, a lot has been said about SMEs. Also, there has been various subject of discussions, seminars, and workshops both locally and internationally about SMEs. Some government have specifically formulated policies to aid the empowering, growth, development and performance of SMEs, while have assisted through loans and fiscal incentives. According to Central bank of Nigeria report (2003) , SMEs are very important economic catalyst in developing and industrialized countries, in developed countries 98% or more than belong to the Small and Medium scale sector. In Japan, 80% of industrial labour force is employed by small firms, 50% in Germany and 46% in USA are employed by smaller businesses.

• Dada Suraju Adefolami, Professor of Finance, School of Business Administration, UNEM University Costa Rica, is a Finance / Management Consultant and Certified Forensic Accountant. You can reach him via: [email protected]; 08052043855