SMEs turn to loan apps as hardship bites
In this piece, Temitayo Jaiyeola explores how Small and Medium Enterprises are patronising loan apps to survive harsh economic realities
The average life expectancy for Small and Medium Enterprises in Nigeria is five years due to harsh economic conditions, infrastructural deficits, lack of access to capital, and inconsistent government policies.
Many studies have shown that about 80 per cent of SMEs fold up before their fifth anniversary. According to a report titled “Perception Study: Efficiency and Impact of Regulatory Activities of Standard Organisation of Nigeria on SMEs,” numerous variables influence Nigeria’s economic climate, impacting the operations of businesses.
There are about 17.4 million SMEs in Nigeria, and they contribute about 48 per cent to GDP and account for 50 per cent of industrial jobs in the country, according to the National Bureau of Statistics.
They are vital to sustainable development since they create jobs that are essential in poverty alleviation and economic freedom for individuals.
They are also the most vulnerable to economic shocks and the country’s lack of critical infrastructure.
In 2022, the Small and Medium Enterprises Development Agency of Nigeria estimated that about two million SMEs in the country crashed between 2017 and 2021.
According to the World Bank, businesses in Nigeria lose about $29bn annually because of the country’s unreliable electricity.
It noted that over 22 million petrol generators powered about 26 per cent of all households and 30 per cent of Micro, Small and Medium Enterprises in Nigeria, increasing the cost burden on businesses.
A 2020 PricewaterhouseCoopers International Limited survey revealed that electricity accounted for the biggest costs to daily operations of small businesses.
A research conducted by the Centre for Democracy Development and SOAS University of London revealed that SMEs in Nigeria get just 1 to 5 hours of electricity in a day.
This is killing businesses, and according to PwC, low electricity supply is responsible for the death of one in seven firms that die.
This over-reliance on fuel has ensured that SMEs and commodity prices are more susceptible to fuel price shocks than normal.
It was why when President Bola Tinubu’s administration removed fuel subsidy, which has more than doubled the price of fuel, members of the organised private sector expressed fear about job losses and the possible shutdown of many businesses.
Prior to May 29, when the petrol subsidy regime ended, many SMEs were already struggling for survival due to harsh economic realities exacerbated by a cash crunch issue.
As the World Bank put it, many SMEs were unable to access credit and fund operations, limiting their ability to scale up production and invest in new projects because of the cash crunch.
The cash crunch caused the country’s GDP growth to fall to 2.31 per cent in the first quarter of 2023 from 3.52 per cent in the fourth quarter of 2022.
So, it was not surprising that after fuel subsidy was removed, the Deputy President of the Lagos Chamber of Commerce and Industry, Gabriel Idahosa, told The PUNCH, “In the near term, there will be a lot of hardship. A lot of small businesses will crumble completely. There will be a drop in production capacity.”
The President of the Association of Small Business Owners of Nigeria, Femi Egbesola’s prediction was bleaker. He lamented, “It is a sledgehammer on micro and small businesses. I just wonder how we will survive. I must tell you I am confused. The economy has been in a basket, but this is suicidal. I foresee quite a lot of businesses going under. I don’t see how micro and small businesses can survive this. Many will go down.”
Conscious of the impact of fuel subsidy’s removal on these businesses, the government had since announced that it would inject N125bn into the micro, small and medium-sized enterprises and the informal sector space to cushion the negative impact of its policy.
In a national broadcast, President Bola Tinubu, said, “Our administration recognises the importance of micro, small and medium-sized enterprises and the informal sector as drivers of growth. We are going to energise this very important sector with N125bn.”
Tinubu noted that the government would spend N50bn on conditional grants to one million nano businesses.
He said the government intended to give N50,000 each to 1,300 nano business owners in each of the 774 local governments across the country.
He further added that his administration would fund 100,000 MSMEs and start-ups with N75bn, giving the businesses access to loans of N500,000 to N1m at nine per cent interest per annum and a repayment period of 36 months.
Access to finance is crucial for SMEs to grow and survive economic shocks like fuel subsidy removal. The average small business in Nigeria earns N223,250 in monthly revenue, a study from the National Bureau of Statistics and the Financial Access Initiative Research Centre of New York University recently disclosed.
This ensures that many small businesses are at the mercy of the economic realities of their customers, leaving them unable to scale production or acquisition.
In emerging markets and developing economies, 55 per cent to 68 per cent of formal SMEs are either unserved or underserved by financial institutions, leading to a total credit gap estimated to be $5.1tn.
According to PwC, the financing gap for Nigerian MSMEs was about N617.3bn annually (pre-COVID-19 pandemic).
So, many SMEs are forced to rely on friends and families, grants, and developmental finance (that does not always go around) to keep their lights on.
However, in recent times, more small business owners have begun to turn to fintech companies that offer loan services for credit.
These companies are not only driving an increase in business loans. Fintech channels recently pushed total consumer credit to N2.35tn in the first quarter of 2023, according to the Central Bank of Nigeria.
Some of these businesses, which offer loans with less rigidity and paperwork than banks, told The PUNCH that the demand for loans had grown by 100 per cent in recent months as businesses search for capital to restock or keep their lights up.
The founders of those companies stated that harsh economic realities were making more businesses rely on more loans because of the constant rise in the cost of goods and services, especially since the removal of fuel subsidy.
The Chief Executive Officer/founder of Trade Lenda, Adeshina Adewumi, told The PUNCH that his firm’s absolute numbers had grown by 100 per cent in the last two months.
He said, “The numbers have gone quite high. In terms of users, we have grown slightly over 100 per cent within this subsidy removal period, June and July.
“The increase in loans is generally across the board even though we do not focus on individuals. We focus just on businesses that need loans to grow their business, and we have seen the number grow significantly high. We have grown by over a 100 per cent in the last two months. People are requesting N50,000 (the least we have seen) and as high as N5m.”
He argued that business owners were struggling to restock as the prices of goods and services were constantly changing in the market.
Adewumi, whose startup serves over 244,000 businesses cutting across farmers, and traders, said there had been an increase in the number of small businesses in need of N50,000 to augment their operations.
He noted that the business had not been able to meet many of the requests.
According to him, the surge in the demand for loans has created a new problem with fintech needing more liquidity.
He stated, “There is a liquidity problem in the market now. Loan apps looking for about N10m to N70m to meet their business obligations have reached out to us. We cannot currently support all the guys, even though they qualify.”
“User base has increased by 100 per cent, but we cannot serve all of them. Disbursement in May was N179m, in June N220m, in July N237m. There is an increase in demand, but supply is constrained.”
The founder of TellerOne, Olajuwon Marc, affirmed that the number of approved loans by his company has grown.
He stated that in recent times, the economy had stifled businesses and the only way they could grow is to borrow more.
He said, “Things are now very expensive and the initial capital businesses have is no longer enough to buy things from the market, and they now rely on loans to survive this. We give out these loans to SMEs.”
He continued, “The number of approved loans has grown to up to 70 per cent. The demand has surged to over 100 per cent. People always need loans, and the harsh economic realities now are driving this.”
Marc re-echoed the concerns of Adewumi that illiquidity in the loan sector was impacting how much loans firms could give, despite growing demand.
He explained that in June, the firm was able to approve N40m because it did not have enough disposable cash.
The co-founder of Regxta, who serves businesses in rural and semi-urban areas, Bello Rukayat, told The PUNCH that the company had been forced to increase its minimum disbursals from N20,000 to N30,000 because its customers were asking for more.
She said, “Our customers are asking for an increment in the value of the loan amount. We used to give N15,000 to N20,000 to our customers, but so many things are now expensive. So, we give more. Our minimum loan is now N30,000. The costs of things are skyrocketing. People are asking for more, even why still owing.”
Rukayat noted that while businesses had begun to ask for more loans, they were also struggling to pay, creating a double whammy.
She explained, “Businesses, especially those not selling essential commodities, are now lamenting and people are not even able to meet their loan obligations again. We have had people tell us that they cannot pay maybe their daily N1,500 obligation but can afford N500 daily. We collect anything they have.”
The co-founder of Sycamore, Babatunde Akin-Moses, corroborated what the other founders had said.
According to Akin-Moses, businesses currently need to spend more because of a high inflationary environment.
He explained that while there was a need for loans, there was also the concern with business income, which had been falling for many.
He, however, noted that his startup had not recorded a spike in loan application following subsidy removal.
While loan apps are offering a temporary reprieve to small businesses, there are still plenty of issues that only serious government action can solve.
Prof Banji Oyelaran-Oyeyinka, in a study titled ‘SME: Issues, Challenges and Prospects,’ said, “Compared to other emerging markets, Nigeria has historically shown a lack of commitment to building a strong SME sector.”
Until the government shows commitment to helping SMEs grow, private solutions will only last as long as road patches in the country do.
https://punchng.com/smes-turn-to-loan-apps-as-hardship-bites/ 
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