Stories by Omodele Adigun
A 2012 research conducted by Enterprise Baseline Survey revealed that only about 4.3 per cent of SMEs in Nigeria were able to get their loans from financial institutions and this low access to loan has resulted in a finance gap of $62 billion for the (Micro, Small and Medium Enterprises (MSMEs).
The research also reveals that two factors are responsible for this: One, the MSMEs don’t have the collaterals financial institution required to access bank facilities, while the number two is the fact that the banks do not have the access to information they need about the MSMEs in assessing risk and making informed lending decision.
With the twin problems of ‘huge collateral gap’ and ‘information asymmetry’, how does a start up raise capital for his/her business? “Seek Angel Investors”, also known as Business Angels, says Mr. Kushal Dutta, the Managing Director of hotel booking portal, Jumia Travel Nigeria.
But who are these Angel Investors or Business Angels? According to the European Trade Association for Business Angels, Seed Funds, and other Early Stage Market Players (EBAN), “Business Angels play a crucial role as providers of early stage, informal, venture capital and competences at the seed and/or development stages of the business life cycle. Angel intervention is long-term, active, and may take a variety of forms.” These include: “An individual investing directly (or through his/her personal holding) his/her own money. He or she is financially independent, i.e. a possible total loss of his/her business angel investments will not significantly change the economic situation of his/her assets. An individual who invests predominantly in seed or start-up companies with no family relationships; A person who makes his/her own (final) investment decisions; A person who invests with a medium to long term set time-frame; Somebody who is ready to provide, on top of his/her individual investment, follow-up strategic support to entrepreneurs from investment to exit. He or she is somebody who respects a code of ethics including rules for confidentiality and fairness of treatment and compliance to anti-laundering.”
Why does Dutta want budding entrepreneurs to opt for Business Angels? He hinges his reason on the banks’ high interest rate and short repayment period.
The Jumia boss said seeking for Angel investors or (Business Angels) to sponsor start-up businesses and provide needed capital is a better alternative than to approaching banks for loans, in view of the usual banks’ high interest rate and short repayment period which might kill the business at birth.. He also mentioned that approaching companies that might be interested in investing in scalable businesses is also plausible, citing MTN’s investment in the Jumia group’s business as an example.
On the viability of copying a successful business model, Dutta was of the opinion that it is absolutely not wrong to do so but the new business must ensure it is offering a proposition that the existing businesses are not already offering. This way, he said, “you can stay on top of your game and only expect that customers will come chasing after you.”
Amongst other practical business advice given by the Jumia Travel boss during a panel discussion at the first edition of the Nigerian Small Business Summit recently in Lagos. gave, was a reiteration on the danger of expanding a business when customers’ demands cannot be met. “If you know you cannot meet customers’ demand, do not expand because one happy customer will tell three people about your great product and customer service. But one unhappy customer will tell 50 other people about his dissatisfaction,” he added.
Collateral registry
In order to aid easy access to finance and allow small businesses prosper in the country, the Central Bank of Nigeria (CBN) with the support of the International Financial Corporation (IFC) has developed the National Collateral Registry and has also strengthened the Credit Reporting System.)
Explaining how it works, the apex bank said the National Collateral Registry is a web-based system that allows lenders to determine any prior security interests, as well as to register their security interests over movable assets provided as collateral. The Collateral Registry facilitates the use of movable/personal assets as collateral that remain in possession or control of the borrowers and thereby improves access to secured finance.
It adds that this will allow low-income earners and small-scale entrepreneurs to secure loans against movable assets. It is the belief of the CBN that the move will not only increase local production but will help in reducing unemployment.
The initiative is expected to improve access to finance particularly for Micro, Small and Medium Enterprises (MSMEs).
The Collateral Registry operationalizes Part III of CBN Regulations on Registration of Security Interests in Movable Property by Banks and other Financial Institutions (Regulations No, 1, 2015).
Eme Essien Lore, IFC Country Manager for Nigeria, said “the online registry coupled with the credit reporting system has been implemented in other countries like Ghana and Liberia with success recorded .”The National Collateral Registry as well as the Credit Reporting Systems has previously been implemented in other countries with amazing outcomes. For instance in Ghana, the collateral registry has facilitated $1.3 billion in financing for the small-scale business sector since it was established in 2010, and $12 billion in total financing for the business sector using movable assets as collateral. We are very excited that a registry is now also in place in Nigeria,”