By Rockefeller Philanthropy Advisors   |  November 30, 2021

Small businesses are faced with critical challenges that compromise their ability to function optimally. Chief among the challenges is inadequate access to financial resources and credit facilities especially short, medium, and long-term capital. Small businesses require funds for their working capital requirements. Apart from meeting the day-to-day needs of businesses including payment of salaries, employing new workers and training, keeping vendors, funds are also needed for diversification- new products and services and for expansion purposes.

Informal sources of finance including lending from family, friends, and others on social networks remain the top source of finance for micro, small and medium-scale enterprises (MSMEs) in Nigeria. This could be due to the belief that the nature of most small businesses makes it impossible for them to access bank loans or credits from other formal sources. Most small businesses do not access funds from formal sources because of the limited information on their credit history and other transactions. This is usually associated with their smallness and newness often referred to as small firm-specific financial constraints.

Despite these, there is now a steady rise in borrowing from formal sources including commercial banks, microfinance banks, development banks, etc. According to Government Enterprise and Empowerment Programme (GEEP) Covid-19 survey, small business owners seem to be increasingly relying on formal sources of finance for their business needs. There has been a steady increase in the number of small businesses who obtain funds from these sources. The survey which had over 7,138 interviews collected from the six geopolitical zones of Nigeria, reports that formal lenders are now filling the finance gap experienced by small businesses.

According to the GEEP survey, borrowing from commercial banks and microfinance institutions has grown from 8-9% in early rounds of the survey to 16-19% in February 2021. This significant change may be due to the willingness of banks and other financial institutions to lend to small businesses. The decrease in borrowing from social networks especially family and friends maybe demand or supply driven.


The survey also presents other interesting findings. Men are more likely to borrow than women (34% to 28%) in general. However, women are slightly more likely to borrow from formal lenders. According to the survey, 26% of women have borrowed from a commercial bank, microfinance institution, and other lenders outside of their network when compared to 21% for men. 86% of men have borrowed from their network, compared to 80% of women.

Here’s how to be prepared!

There is a need for small business owners and managers to be well prepared to access these formal lending. By implication, both small business owners and managers must be deliberate in taking part of those businesses that will benefit from formal lending sources.

Essentially, these considerations are necessary especially for small business owners and managers.

Be sure the business really needs external funds!

In some cases, external funds may not necessarily be the need of small businesses. It could be that businesses do not need cash infusion or credit lifeline, but a cut in operational expenses or complete elimination of some spending. In some cases, a business may need to properly structure its operations in terms of human resources, accounting, book-keeping etc. before seeking for external finance. Business owners and managers need to make critical decisions before exploring external finance.

Have the right information!

While some businesses require cash to bounce back from the impact of the pandemic, having the right information about formal financing available, is a necessity. Small business owners and managers need to

stay abreast of public financial assistance available. Regular checks on Central Bank of Nigeria and other development finance institutions’ (including Bank of Industry, Bank of Agriculture, Development Bank of Nigeria) interventions will help small business owners and managers in knowing when and how to apply for the funds. Small business owners and managers should also visit information desks of financial institutions to know what options exist. Interestingly, most commercial banks and microfinance institutions have dedicated desks for MSMEs.

Documentation/Record keeping is key!

Several studies show that a major reason why small businesses are unable to access both informal and formal finance is due to their inability to keep records of transactions. Recordkeeping includes keeping track of sales, inventory, etc. in an orderly manner that also ensures easy retrieval when needed. Apart from satisfying such obligations as legal compliance, planning, tax preparation, etc., having proper documentation is crucial for loan/credit considerations.

What Other Stakeholders Can do

For financial institutions, the government, and other MSME-allied bodies, there is an urgent need to support small businesses in their quest to obtain finance. As information is key, MSMEs should be made to be aware of the different financing available. By implication, the institutions can reach out to the small business owners and managers through seminars, workshops, information leaflets, social media, and traditional media campaigns.

SMEs also need help in terms of documentation of their business operations. They need to be made aware of the importance of record-keeping and its implications on access to credits. There should also be more efforts aimed at addressing collateral requirements and other loan terms for small businesses. In this wise, flexible loan terms and alternative collateral requirements including guarantors, certificates etc. should be considered.

Considering the role of small firms in wealth creation, employment opportunities, and other key contributions to economic growth, improving SME’s access to finance and finding alternative/innovative solutions to sourcing credits have become imperative for all players in the entrepreneurship ecosystem.