For many small business owners, that joke is a harsh reality. Walk into a branch with your modest shop records or your groundbreaking business idea, and chances are you’ll leave with a long list of collateral demands, sky-high interest rates, or an outright rejection.

Why banks don’t lend to small or struggling businesses

• High risk of default:

With inflation, unstable incomes, and businesses struggling to stay afloat, many borrowers simply cannot repay. Banks prefer to avoid risk rather than chase defaulters through costly legal battles.

Most small businesses are unable to get loans because they are unable to provide sufficient track records of noteworthy performance that will convince banks that they have the capacity to pay back without defaulting on repayment.

• Collateral demands:

Nigerian banks usually insist on landed property as collateral. For a young entrepreneur or first-time borrower, this is nearly impossible. A thriving business with no tangible assets like land or property often doesn’t even make it past the first stage of loan assessment.

Most small or growing enterprises don’t have those kinds of assets lying around, especially when they’re still trying to find their footing. However, a good business idea, a loyal customer base, or even steady cash flow often isn’t enough to convince banks.

Without collateral, your chances of securing a loan are slim to none, and that reality forces many entrepreneurs to either scale back their ambitions or turn to other alternatives.

• Inconsistent Cash Flow:

Banks love predictability. You need to be able to show proof of steady income, reliable repayment schedules, and the ability to meet obligations. Unfortunately, that’s where many Nigerian small businesses struggle.

Inconsistent cash flow is a reality for small businesses and startups in Nigeria. A startup founder might raise some funds or get a big contract today, then go months before another payment comes in. That stop-and-start pattern makes it tough to keep a steady cash flow.

Banks, however, want to see money coming in regularly before they can trust you with a loan. So even when a startup has potential, its irregular income is enough for the bank to say no.

• High interest rates

With commercial lending rates ranging from 20% to as high as 30%, loans can become more of a burden than a boost. For many SMEs, taking such loans is simply unsustainable.

It’s easy to underestimate how much interest eats into profits. For instance, as a startup, you borrow ₦1 million at 25% interest. A year later, you must repay ₦1.25 million. If your business makes a profit margin of just 15%, you’re running to stand still.

This is the harsh math that keeps many entrepreneurs awake at night and pushes them to look for alternatives.

The Alternatives SMEs Are Turning To

• Fintech lenders:

Some businesses turn to fintech lenders that offer accessible instant loans with just a smartphone  as an alternative. However, while approval is fast and paperwork is minimal, the catch is often high interest rates and strict repayment deadlines. Making these loans better for emergencies rather than long-term investments.

• Crowdfunding and angel investors:

A growing option, particularly for startups in technology, agriculture, education, and other growing sectors. Platforms and networks allow entrepreneurs to pitch their ideas and attract investors. This route requires transparency, strong storytelling, and a compelling business case.

Building Your Credit Muscle

One of the hidden hurdles in Nigeria’s lending system is credit history. Banks are wary because many people have no track record. You can fix this by:

• Starting small with fintech loans and repaying faithfully.
• Joining a cooperative and building a reputation for reliability.
• Keeping proper business records, even if informal.

Over time, these steps create a financial footprint that makes bigger lenders more willing to listen.

Most importantly, don’t borrow blindly. Always compare your profit margins to the interest rate. If your business can’t comfortably absorb repayment, the loan could sink you rather than save you.

At the end of the day, Nigerian banks are not entirely wrong to fear the risks, but their caution often shuts out the very people who keep the economy alive. So, while they wait for you to make it big before offering a hand, small businesses are left to hustle through fintech loans, family support, government schemes, or investor funds.

Nigeria’s entrepreneurs are not short of ideas, but without capital, most remain trapped in a cycle of smallness.

Credit to the domestic economy plays a significant role in the economy’s growth as it helps spur growth in economic activities in the real sector.

The “Money and Credit” data of the apex bank show that in November 2022, credit to the private sector economy skyrocketed to previously unheard-of levels, reaching an all-time high of N64.22 trillion.

Compared to the N63.48 trillion figure from the previous month, this implies an increase of 1.16 percent.

Loans from the banking sector to the government as of November 2022 totaled N22.64 trillion, while credit to the private sector was N41.58 trillion, or 35% and 65%, respectively, of the total credit to the economy.

The data analysis revealed that the government sector was primarily responsible for the rise in total credit.

For instance, during the review period, credit to the government climbed by N8.79 trillion, from N13.84 trillion recorded as of December 2021 to N22.64 trillion, a 63.6 percent rise in just 11 months.

On the other hand, credit to the private sector increased by N6.66 trillion between January and November 2022 to stand at N41.58 trillion, a 19.1 percent increase year to date.

The Nigerian economy witnessed a massive surge in its credit in the past three years, on the back of the low-interest rate environment following the COVID-19-induced recession in 2020, as seen in the data obtained from the bank’s website.

According to the CBN, the Nigerian economy recovered from the economic contraction at a faster pace due to the intervention of credit into the economy, which ensured that the nation recorded growth after only two consecutive GDP declines.

The CBN during its November 2022 MPC communique revealed that its policies have helped ensure a sustained positive trajectory for the economy.

“The economy has thus, sustained positive output growth for seven consecutive quarters, following the exit from recession in 2020. The consistent positive performance recorded was driven largely by the positive growth in the non-oil sector, particularly in the services and agricultural sub-sectors, complemented by continued policy support by the bank,” the CBN said.