You have probably heard people joke that Nigerian banks are quick to offer you loans when your business is already booming, but when you’re struggling to stay afloat, they suddenly turn their backs.
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.
