Moderated by Victoria Ekanem, a Business Professional, the Funding for SMEs session focused on the problems, bottlenecks and solutions to help business owners thrive.
The session comprised experts in the field including Ayokunnumi Abraham, Head, SME Products & Segments, Union Bank; Mayowa Adeosun, Co-founder, Sycamore; Olufolake Ikumapayi, Head, SME Unit, LSETF; David Lanre Messan, Lead, FirstFounders; Oparinde Babatunde, Director, Special Projects, Yellow Card and Ekundayo Ayeni, CEO, Business Plus, USA.
The first focus pointed to the impact of the current economic environment on the overall lending appetite owing to the recurring changes, what lenders have done to restrategize and the steps or precautions these SMEs who have borrowed should take.
Responding to this, Ayokunnumi Abraham, Head, SME Products & Segments, Union Bank, said the current economic climate of Nigeria has not reduced lending appetite, but there has been a redistribution because some sectors of the economy are more impacted negatively than others.
“Case in point is the issue of security,” he said. “What it has done is to move the need for resources from one area to another. So either reduced or decimated completely, people move and once they do, the need in the area increases.”
He pointed to a second opinion as inflation, which makes things really expensive compared to previous years. “What this does for the lender is that it creates opportunities to lend because now you need more money to buy the same quantity that you bought last year.”
“This also means that lenders have to relook how they do the lending because you have to stop lending to an area or sector and start lending more to another area or sector because of these impacts.
We need to first understand that a lot of the money given out by the lenders are not theirs and they have a responsibility to make sure that when the money goes out, it comes back to the owners. What I would say that lenders are looking at especially for MSMEs is that they have consistency and some level of predictability in cash flow.”
In the same vein, the issue of repayment by small businesses and how lenders respond to them was raised. How has this affected lenders’ ability to lend to these businesses?
Abraham said: “Back to the last point I made about predictability and consistency, the truth of the matter is that the work the small business owner has to do is a lot. What I mean by ‘the work’ is; outside of selling, most of them take up the role of the salesman, accountant, and others because they want to make themselves look good and attractive enough to attract funding. They can’t afford getting a freelancer to do the jobs, needless to say employing someone full time.
Back to the question, Banks are there for business. They cannot stop lending because somebody is not paying. From a loan portfolio standpoint, what the bank does is – if a particular sector or area in a state is notorious for non-repayment or very late repayment of loans, they simply reduce, or where necessary, shut down lending to that area, but will continue to give to other areas.
The impact of non-payment or late repayment of your own loan can affect access to funding by your neighbor.
Added to the above question, capacity building for the business owners also plays a key role and that’s what most lenders look for; how much do the business owners know about the lending space or how to run a business?
Mayowa Adeosun, Co-founder, Sycamore explained that in terms of capacity building in relation to repayment, businesses also want to make relationships with people they believe at the end of the day, and it can be a sustainable business relationship. “So we want to build capacity, we want to see that businesses are thriving because if they do, they can see us as their financier and we continue to do business, it’s a win-win situation.
But the thing is that it’s quite difficult to pinpoint good customers or borrowers and what lenders are doing now is that they are putting lots of money into building algorithms and systems that can detect patenting trends. Historically, these were done by individuals behind the desk. Now, technology has been built to identify those patents and reduce the amount of time it takes to qualify an individual.
So as a small business, what you’re trying to do is position yourself so you can gain the algorithm. Once you’re given the approval, you now need to build a relationship with your bank or lender. That way you can build capacity and eventually, once you build that relationship, you can gain lots of benefits.”
On her part, Olufolake Ikumapayi, Head, SME Unit, LSETF, enlightened that when these same business owners are approached and asked what their major challenge is, over 70% will tell you funding. But on closer inspection when you’re having interactions with them, you realize that even when they have the money, sometimes, it’s not enough because they don’t have the capacity or skillset to manage those funds.
“So capacity building is very critical to every business person. Knowledge is a continuous process, there are new things that keep evolving, there are better ways to become efficient in running your business. You’d always have to keep learning more to be able to deliver more; you can’t give what you don’t have.
By improving yourself and your skillset, you get to deliver more and your clients are more satisfied.”
Giving a similar opinion, David Lanre Messan, Lead, FirstFounders, said: “For me, I always say that first, there are various options to getting funding for SMEs and looking at just lending is not the only option to get your business going. But then, it’s also important to note that your customer is your first source of revenue; you should have exhausted that option before you start to think about lending or taking money from investors.
Oftentimes, SMEs come to me and say ‘I need some amount of money,’ and I ask ‘what is your monthly recurring revenue at the moment?’ Let us be guaranteed that you’re even making money as you’re going to lend because you want to either scale your product or consolidate upon your product market theme.
So, the readiness to get that lending, investment or finance is important and that’s where I think capacity building should focus more on in terms of preparing businesses to be investor ready. How are you doing with your numbers? How are you traditionally working with your customers? Let us see that you have made a first effort in terms of getting your business to a certain point and then the banker can know that the metrics to which you can get funding exists within your books, and then, we can now give you money.”
What are the tools that lenders leverage to aid digitizing these businesses and helping them formalize their business?
“One of the important tools for formalizing businesses is licensing their registration,” Oparinde Babatunde, Director, Special Projects, Yellow Card highlighted.
“Getting the right licenses for your business is very important in getting funding. Another thing is access to business development services; as said earlier, it’s not just enough that you can run the business; do you understand the finance part of the business? How’s your marketing going? Can you take that marketing online? Do you have access to simple tools like Canva to create digital content and put them online? These are very crucial for formalizing businesses.
Another thing is financial literacy which is something we do at Yellow Card – We move from city to city, educating people about financial education.
It’s not just enough that you’re able to access funds, are you able to manage these funds adequately? Do you understand what projecting is? Do you understand your customer segment? Do you know your customers you’re targeting?
If a lender or borrower knows that these businesses understand these basic terms, it gives them that confidence, they see them as credit worthy and are able to offer them credits.
We also preach generally–move your business online because that would give you more traction and access to more people beyond your locality/region. An idea in one place can be a business in another place; you need to expand your reach.”
Ikumapayi further noted that in this aspect, it’s as little as even getting a business name. Many NMSMEs (Nano, Micro, Small and Medium-sized businesses) avoid wanting to register their businesses and it’s understandable, because of tax, especially Lagos State Employment Trust Fund will go after them.
“But I would like to quickly assure you that the benefits outweigh the disadvantages of not getting your business registered. If you have your business registered, it’s easy for banks and other social organizations to consider you for a loan.
We do give out loans to businesses that are not registered, that’s our micro enterprise channel, but of course the amount you can get is limited –N50,000 to N250,000. On the other hand, if your business is registered, you can get up to N5 million.
Even asides that, would you want to work with a business that’s not registered? You don’t know where to track them or how to trace them. Everyone feels endeared to working with a business that’s formally registered; it shows some level of seriousness and commitment. From there, you can also access other forms of financing, investments, angel investors and the likes.
As it relates to digital literacy, we encourage people to move from the traditional way of doing business to operating online because your customers are not necessarily in your immediate locations, you can find customers everywhere.
We take Lagos State residents on training across several digital skillset to increase their capacity to be able to grow their business beyond the shores where they are operating.
Abraham joined in to say that: “At Union Bank, we understand that financial literacy and business literacy are key. There’s a difference between knowing how to bake and running a bakery. You need financial and business literacy to run the business.”
In reference to Messan’s point that your first source of funding are the people who buy from you, Abraham stated that another source of funding are the people who sell to you because what you then get is money at zero cost to be able to run your business and generate some income. At least, test your business and run it for some time before you start to look to borrow.
Union Bank organizes programmes to deal with these issues. As a business owner, it’s important to constantly pursue business literacy, negotiation skills are key here.
One of the simplest and most difficult things to do is to pass all your funds or 95% of your sales through the bank. If you are able to achieve that discipline, what you have done is to make anybody who is looking to invest money in your type of business to have an authentic source to validate your claims about how good your business is and you have some level of structure around your business. You’d be surprised what that step will do for you in terms of accessing funding for your business.
Messan also explained that beyond registering your business legally, it’s important for you to understand your business model. You need to at least have a pitch deck or a product scope that allows you to understand the type of product you’re taking into the market and the specific audience you’re trying to reach.
In formalizing your business, you have to look at the legal structure of your business, the accounting structure of the business where you get to do things like financial modeling.
Financial modeling helps you understand the revenue channels that the business would have because if you don’t think and research it, you might not be able to know where to lay a lot of emphasis in terms of your revenue channels.
If you’re an accountant for example, apart from providing accounting services, there are other services that you would provide to your target market that they would need and you would probably not think of if you do not document it and have a session with those customers.
People think to get funding you just need your financial statements, but now, people are asking for financial models, the breakdown of your projections, revenue channels and where you have the biggest strength. That aside, as a business person, in formalizing your business, you need to also need to understand your operating model, the sought of operation that guides your business. In your operations, there’s cost and in identifying that operational cost, it allows you to know how much you’d need to consolidate upon the value chain within your business structure.
You also have the social end of it. If I want to invest in your business, I want to see that you have a website, you’re on social media and you the CEO or the key drivers of that business also have a presence online that I can make reference to. For people to invest in you or even give you money, they look at what we call the five Ts– Total Addressable Market, Team, Technology/Product, Traction and Terms: what have you committed to the business? All of these form part of the formalization process for your business.
At the end of the day, your banking structure, accounting structure, legal, operational, social positioning structures, financial positioning as a company are all there, giving the company an integrity of survival.
Ekundayo Ayeni, CEO, Business Plus, USA
On simplifying processes for small businesses, Ekundayo Ayeni said there are things that should be included in your metrics, one is the ability to get mentorship, a person who is able to prepare you and give you direction. Secondly, you should seek a way to make decisions carrying others along and having accurate documentation.
“Your problem is not money. Understand the process, get tutelage and exposure from experts.”
Ekanem concluded by saying the ability to digitize and formalize your business helps you to detach from the business, enabling you to become a person, while your business can exist on its own.