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MSMEs’ cash flow challenges and corporate banking products

By Editor
18 November 2016   |   2:22 am
Micro, Small and Medium Scale Enterprises (MSMEs) have long been identified as the primary engine of growth. In Nigeria, according to a 2013 survey by Small and Median Enterprise ...
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Micro, Small and Medium Scale Enterprises (MSMEs) have long been identified as the primary engine of growth. In Nigeria, according to a 2013 survey by Small and Median Enterprise Development Agency of Nigeria (SMEDAN), in partnership with the Nigerian Bureau of Statistics (NBS), MSMEs contribute about 48 per cent of Nigeria’s Gross Domestic Product. It also employs 84 per cent of the country’s labour force.

Therefore, achieving meaningful growth in Nigeria is very dependent on being able to support our MSMEs in the face of a challenging economy.

The characteristics of MSMEs, which is to be small and nimble, typically offer numerous advantages, such as speed of decision making, expedited execution capabilities, as well as adaptability to change, among others. However, multiple surveys continue to show that MSMEs face significant funding challenges.

MSMEs typically face a variety of challenges, which is not limited to financing- access to credit, short term funding, but also degrees of business regulation, protection of property rights. It as well, has numerous operational challenges- power outages, logistics, access to transportation.

These challenges, according to the Bankers Committee, are currently being addressed through various activities of the states and Federal Government, which have introduced policies that are expected to help improve the ease of doing business.

The World Bank and other development institutions are also assisting through various intervention programmes that are meant to help reduce Nigeria’s infrastructure deficit.

In terms of addressing the core financing needs of MSME’s, Deposit Money Banks (DMBs) have long been identified as a critical partner and have developed tailor made solutions that can help mitigate some of the cash flow challenges faced by MSMEs. A brief overview of some of these challenges and solutions available to MSMEs are as follows:

Access to Credit
When compared to large corporation and national governments, MSMEs often face more challenging terms and conditions before they are able to secure finance from financial institutions.

The Nigerian banking sector is well aware of these challenges. As a result, banks are active participants in the CBN’s Micro, Small and Medium Enterprises development fund, which has up to N220 billion for intervention in MSMEs sub-sector at a single digit rate of nine per cent. It is still available now.

Sudden and abrupt shortage of operating cash
All MSMEs will at some stage experience situations when unanticipated expenditures will arise, such as the need to replace a critical business equipment required to complete a very profitable job.

To alleviate this challenge, Nigerian Banking institutions offer a variety of flexible products, which include overdrafts, equipment loans, working capital finance, distributor finance, among others. Additionally, Nigerian banks also offer dedicated business current accounts for SMEs, which have low account maintenance charges to reduce burden on SMEs.

Delays in payment from debtors
This is a frequent dilemma faced by MSMEs, whereby a sustainable and thriving business has sold goods to a customer, but is yet to be paid for that transaction. Consequently, this creates potential cash flow challenges for the operator, as they face difficulties with meeting other obligations or replacing the stock.

Notably, within the Nigerian Banking sector, there are dedicated short-term products to alleviate this challenge. Specifically, a number of Nigerian Banks offer invoice discounting facilities like First Bank, Union Bank, Keystone Bank. Additionally, letters of credit facilities also exist, which Guaranty Trust Bank, Access Bank, Unity Bank, Wema Bank, Zenith Bank, Union Bank and Keystone Bank offer.

Stock Turnover (either too slow or too fast)
The challenge here is that MSMEs occasionally experience sales fluctuation, which translates to higher inventory requirements with associated need to increase storage. As an example, you have a sudden growth in sales, which means you have to buy more goods to meet up with demand, these goods have to be stored somewhere.

From a Nigerian banking perspective, dedicated products also exist to mitigate this challenge. We previously noted the distributor finance, as well as, working capital finance. However, there are additional products on offer such as Stanbic IBTC’s commercial real estate product, which can be used for warehouse financing or UBA’s financing for storage facilities.

Inadequate planning and cash flow projections
As discussed earlier, MSMEs also face challenges caused by external factors. However, it needs to be said that occasionally, the MSMEs can do more to plan in advance for these challenges. This involves ensuring adequate record keeping and business planning. While this may not be the forte of MSMEs, record keeping and business planning are critical requirements for success in any business venture.

Interestingly, as the Nigerian banking sector increasingly aligns with MSMEs, this deficiency is also being addressed by some deposit money banks creating dedicated advisory units to assist MSMEs with record keeping and business planning.

Fidelity Bank’s Managed SME programme is an example of advisory service being deployed within the Nigerian Banking sector. First Bank’s SME Connect and Heritage Bank’s SME Support Services are additional examples of banks offering small business advisory services.

Cash flow challenges are synonymous with most businesses, including MSME’s. However, by utilising some of the solutions proffered by DMBs, MSMEs are better equipped to remain afloat and manage their cash flows more efficiently.

• This article, written by the Bankers Committee of Nigeria, is the third in the series, focused on raising awareness around Nigerian banks’ efforts and most importantly, educating the public on opportunities available to them to foster their active participation in our nation’s diversification efforts.

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