Over the years, loan facilities from financial institutions have mostly been enjoyed by large corporations while the Micro, Small and Medium Scale Enterprises (MSMEs) struggled to access funding. With the recent surge of digital-based financial institutions, a growing number of entrepreneurs and small business owners can now get short-term loans in a seamless and fast way without collateral or external guarantors. This helps small business owners to avoid the sometimes difficult requirements of commercial banks such as collateral and guarantors that may never be easy or available at all.
However, loans from Digital Banks typically have very high-interest rates which are usually presented as a flat monthly interest which could translate to as much as 180% interest rate per annum!
MSMEs Funding Sources
Micro, Small and Medium Enterprises (MSMEs) are entities with an asset base of less than or equal to N5 million and not more than N500 million excluding land and buildings with employees between 1 and 200. Several reports have shown that MSMEs contribute about 50% of national GDP, account for up to 96% of businesses and over 80% of employment in Nigeria. This clearly depicts the importance of a healthy MSME industry in the growth of any economy. However, Nigerian MSMEs face several business challenges that have resulted in their extinction. These challenges include skills shortage, lack of funding, high-interest rate, access to markets, poor infrastructure, tax regimes and many more but access to quick funding remains one of their biggest challenges.
There are several funding institutions in Nigeria that offer various forms of business funding to MSMEs. Such funding institutions include Microfinance Banks, Commercial banks, Merchant banks, Development banks, Venture Capital Firms, Private Equity, Angel investors and Development Finance Institutions (DFIs). More recently the new digital-based financial institutions which include new digital banks and existing commercial banks have created quick and easy loan products targeted at individuals, micro and small enterprises.
However, MSMEs must have the understanding that there are several stages of funding a business. A business at its earliest stages of growth with no track record or market share and very limited assets will find it very difficult to raise relatively lower cost short or long term funds from traditional formal financial institutions.
MSMEs typically grow in stages which include; early stage, expansion stage and later stage. In the early stage it is best to restrict funding sources to less structured sources which include individuals and more recently digital banks as detailed below:
- Personal fund
- “3F” – Friends, Family and Fools
- Personal Credit Card and other personal borrowings
- Business Angels: These sources are usually willing to lend small amounts of money without asking for a business track record, market share or collateral. They lend based on their personal relationship with the business owner and their informal assessment of the owner’s ability to pay back the loan.
- Quick and easy loans from mainly digital banks and some commercial banks are characterized by speed, easy access usually online or through mobile phones, enabling entrepreneurs to get loans without collateral. They include:
- Quickcheck, a fashionable disposition platform for people and tiny businesses. According to the platform, users can access quick and hassle-free loans of up to 30,000 Naira without any collateral for a duration of either 15 or 30 days.
- Zedvance gives loans to salary earners. They provide collateral-free loans up to ₦5,000,000 to be paid back within 18 months. Their interest rates range from 3.75 to 4.5% monthly. They also offer Nano loans between #2500 and #100,000 depending on the customers’ credit history.
- FairMoney provides you with loan options that meet your financial needs at any time, by making funds available to you within 5 minutes of application. FairMoney allows you get up to ₦ 150,000 instant cash loan without collateral.
- Branch makes it easy for people to access loans anytime, anywhere. Sign up is typically in seconds, convenient and reliable. You can access up to ₦200,000 on your mobile phone anytime and anywhere.
- Renmoney provides micro-business loans up to N6 million. To get a Renmoney SME loan, your business must have a good income statement history and can boast of regular monthly earnings for repayments.
- Lidya is an online platform that provides businesses with access to finance. The platform offers small and medium-sized businesses with unsecured loans of between $500 (#181,250) and $15,000 (#5,437,500). According to the founders, “Lidya uses technology and algorithms to assess the risk before granting the loans, it allows them to offer financial products to these customers at a low cost.”
- Carbon, formerly Paylater is an easy and completely online lending platform that provides short-term loans to individuals and small businesses in Nigeria to help cover unexpected expenses or urgent cash needs With Carbon, you can have access for up to ₦1 million loan with no collateral, guarantor or paperwork.
- Kwikmoney now referred to as Migo is another reliable fast online loan platform in Nigeria. They collaborate with banks, mobile operators and technology companies to offer quick collateral-free loans to Nigerians. The reimbursement is between fourteen days and thirty days. It offers a loan amount of up to ₦500,000 all with no collateral.
- Specta, owned and run by Sterling Bank, Specta gives you loans of up to ₦5 Million in one transaction all within 5 minutes with no collateral, paperwork or visit to any office. Specta has several packages which include aPrime— opened to everyone and requires no profiling, Specta4Business— a package for businesses and business owners and SpectaBasic which is restricted to already profiled salary earners. With Specta, you can take care of urgent personal and business needs anywhere, anytime.
- KiaKia could be seen as a digital cash investor for Nigerian businesses. It utilizes psychometrika, big-data, machine learning and digital forensics for its proprietary credit scoring and credit risk assessment algorithm to provide direct and peered personal and business loans to millions of individuals and SMEs without credit information. The name KiaKia was derived from a Nigerian language which means “Fast Fast”. According to them, the solution is very simple and fast, but highly effective and efficient.
Note the loans from individuals such as the 3Fs and angels are typically small but could be long-termed while those from Digital banks are usually small, short-termed and typically with much higher interest rates calculated on a flat monthly basis which could translate to as high as 180% per annum!
This is the first part of our series on business funding for MSMEs that are startups or are in the early growth stage. Once an MSME has grown its market share and has a track record it becomes more attractive to long term structured lenders and equity providers who can provide much larger funds at a much cheaper interest rate.
Watch out for our next article on Long-term business funding sources.
Struggling to get the required loan for your business expansion or you need advice on the right type of loan for your business? We can assist you to get the loan you need.
Call us today on +234 (0) 815 8300 37, 0817 908 5185.