Osagie: Education, Access to Information Critical for SMEs’ Survival

Jerry Osagie, a business and personal finance expert, and the author of ‘Borrowing Made Easy,’ a book on access to finance, in this interview says capital does not guarantee business success even as he underscores the importance of entrepreneurial education and market information. Oluchi Chibuzor brings the excerpts:

In your experience as a financial advisory expert, can you share with us critical success requirements for SMEs?

Based on my experiences and on what I have seen from SMEs, there are critical success factors that will support the growth of SMEs especially in emerging markets like Nigeria and the African continent. While a lot of people talk about financing, basically I think it is just one aspect. One of the things that I would talk about is lack of access to markets. Access to markets is very critical for SMEs to thrive so that when you have products and services; who do you talk to, how do small businesses showcase their goods and services? So, access to market is something that is critical to the survival of SMEs amongst other factors. There should be good infrastructure, to support technology, logistics, payment, and collaboration. Also, financing is an important part of any business. SMEs require financing and business support is also very important to SMEs. As an SME or a startup you need capacity building for people to hand-hold you through that process of growing from a startup to a thriving business. Technology is also critical for their success. For instance, in today’s world, you cannot solely depend on the opening of new stores to expand your reach but must leverage technology to enable you to end up on different platforms or in different countries. In addition, technology helps SME to receive or make payment, organize their business, inventions, staff, and other aspects without spending a fortune. If you look at the supermarket or retailer with two or more stores, they can leverage on simple technology whereby they pay as little as N3000 per month to leverage what they called enterprise resource planning, or accounting tools to manage the entire departmental store. Then, the prevailing policies in the country of operation are very important. In the country where you see SMEs thrive and are doing well, the policies and framework there must have added to their growth.

There must also be an opportunity for SMEs to have access to information. Information must be democratised. For instance, if I am producing wood or shear butter, I must be able to have the critical information for wood or maybe a country or people that need what I am producing. If you look at the agricultural value chain, some farmers produce maize and may require manufacturers in the food or pharmaceutical industry who require the same as an input in their own production.

A lot of people have mentioned that capital is the most important need for SMEs. What is your opinion about this school of thought?

Money is important, but money is not the most important thing for SMEs in my opinion. A lot of people have had access to funding and they have made a mess of that business. The first thing is the right entrepreneurial education or training; you do not have to go to school that is very academic, but going through the normal entrepreneurship system of education. When you go through that, you are able to allocate resources efficiently and you know sometimes all you need is the market. For some people you will see a situation where somebody just collects goods from someone that has a lot of them and goes into the market within three days, sells them and goes back and still makes some gains. Some will continue like that until they start up their own, so most times capital is not the number one thing even though it is one of the most critical factors for SME to succeed.
How do you generate and develop those ideas? Look for the market; customers are critical. If you have funds and produce a lot of things and you do not have customers to sell the goods to, there will be problems. However, if you don’t have the information on customers to sell as well as every other thing and you keep talking about funds, you might be awash with money and not know what to do with that money. So, business education, support, ability to grow the idea and not just funding alone is important to the success of the SMEs.

Can you explain to us the various sources of funds that can enable SMEs and businesses to grow?

Some can be free. One of my bosses once said that one of the ways to get something is to beg. Some people can get capital in the form of gifts from friends and family as donations. For instance you might say you want to start a food retailing business, I want this barber shop and I need just like N300, 000. You might just get that from family and friends, who may require you to write a one-page summary of what you want to do, how and the returns. Gift is important, even though you might not see some of the official protocols around that. Also there is equity in the form of investment and some people can tell you, you are putting out this business and I can invest, so you can either have a single investor or multiple investors or you have a crowd-funding whereby people come together to put money. Also there is credit which is in the form of a loan and some people have started business with this, even though I advise some people that except you are in that line of business and understand that business before using loans to establish it. People must not use loans to do trial and error. So all these funding sources have their own advantages and disadvantages of their own. Debts in the form of loans have theirs as well.

Though you have clarified the critical things that can enable SMEs grow and be more productive, majority of businesses still feel that finance is one of the most important aspects, and that credit plays a major role in solving this gap. Do you believe that?

When people come to you, they will tell you that it is money that they need. Credit do play a major role in solving financial gap because few people would want to give you the money they have for you to start a business and investors can come in with equity. But with the democratisation of credit whereby people use technological platforms, you can access credit upfront up to a particular limit or percent especially when they know your history. Credit is seen as the first solution to solving the financial gap among lots of businesses. I will agree with them even though I said earlier that financing is not the only challenges facing SMEs, but in solving financial gap that is required to make businesses grow, credit is a major factor and can go a long way in bridging that gap, especially to reach our potential and that is why a lot of governments, central banks and credit companies are coming together to solve the credit gap and make people bankable.

Can you educate SME operators on requirements to access loans?

A lot of individuals and MSMEs constantly seek loans but when you ask them simple questions, they don’t have answers. For instance, what they want to do with the loan (purpose)? So, it is important that SMEs are able to know what makes them eligible for a loan in the simplest format. A business that is looking for a loan must first determine what is the purpose, because when there is no purpose abuse is inevitable. SMEs must identify the financing gap either by themselves or can have an adviser to identify what are the financing gaps they need. If they establish that there is a gap.

Secondly, SMEs must determine the purpose. As a lender one critical thing that I must know is the purpose of your loan, even if you say you want to go and blow it in a party. So I will be asking myself if the purpose serve what I am looking to solve in the market. Do I have a product to meet the need before thinking of if he or she can repay. When you know the purpose, then you must know the kind of loan you want to get. For example, somebody might say they want an additional machine that would help increase business output or meet shortfall in performance. Here, such a person might not need to get an overdraft but an equipment or asset finance facility.

So, you can say what I need is asset finance. If I am able to approach this credit company or those that sell the machine and can give me this machine on credit; I would have achieved my objective. Because I want to buy this machine and be able to produce this and I would consistently pay you back. At that point in time you probably do not need an overdraft as you are not addressing overhead.

One other thing I tell SMEs is to formalise their business because it is important. It is good to start individually using your name, but for you to scale as most big corporations, you need to formalise your business. It is also important for you to have a business plan. A lot of people that want to finance your business want to see what you want to use the money for. In addition, you must be able to determine your cash-flow. How much money is coming or going out? As a small business or any business at all, you should be able to say how much I want to be putting into this business to run it or somebody is given me and then how much will be coming in periodically in order to be able to pay this loan and also retain my business. For instance, you must know the timing of your cash flow and have an idea of the amount when they come.

People will also say that you must have a very good financial statement. One thing is that we are using a lot of alternative ways to evaluate people to give them loans; but you must start gradually as there are things you can be doing without all this financial statement. But it is important today if you say you are an SME to have a footprint even if it is with a microfinance bank, cooperative, or other financial institution that will show like a record. We even have digital banks all over. Those financial statement are often good because with technology you can review every money you have everywhere and as an SME that is structure you should ensure that a lot of the things you are doing have records and if you know that you do not have records you must try to have financial records, and you do not need much education to get that done. Even if you go to a cooperative, you have a record that they know this person is saving, bringing this amount and we are able to give this amount of money as loan; you should be able to do this to not only your financial institutions but to your credit union, local markets and association. Another thing that is important is your credit status. Since 2009, the Central Bank of Nigeria instituted a private credit bureau, where I am able to check your credit history and see your past performances on any loan you have obtained to determine your borrowing character or credit worthiness. Lenders will check If you have been in the financial system, borrowed, did you payback those loan because there are a lot of bad borrowers and if they see you did not pay back those loan or it take time before repayment, they have a feel of your character and may play a major role in their lending decision.