SME finance and Covid-19 pandemic

Globally, Small and Medium Enterprises (SMEs) are critical to the development of any economy as they possess great potentials for reducing poverty through employment creation and income generation. This sector also improves innovation, local technology, output diversification, development of indigenous entrepreneurship and forward integration with large-scale industries. Further to this, in Nigeria, many people work for these Small and Medium-sized Enterprises (SMEs) for subsistence. Therefore, the importance of SMEs is well recognized and documented in Nigeria. Regardless of the significant contribution to the economy, SMEs’ survival rate is significantly lower than that of large corporations.

Unfortunately, SMEs in Nigeria have underperformed over the years. However, these SMEs in Nigeria constitute more than 90% of the businesses around; their contribution to the nation’s GDP is below 10% according to recent data. Empirical evidence shows that finance contributes about 25% to the success of SMEs, and one of the key issues attributed to non-performance is lack of access to funds. Having access to finance gives SMEs the chance to develop their businesses and acquire better technologies for production, therefore ensuring their competitiveness. However, funding has remained one of the key SME internal issues that confront most enterprises in Nigeria today. SMEs in Nigeria face the financing gap, and this restricts their economic prosperity.

Recall, Small and Medium Development Agency of Nigeria (SMEDAN) is the Nigerian government’s institution to develop the SME sector. The agency provides insights into the definition of small businesses based on the number of employees. The agency defined small and medium enterprises (SME) as a business employing one to 200 persons. The SME sector in Nigeria is bedevilled with many challenges. Among these, shortage of finance occupies a very central position.

For several reasons, large firms may have a comparative advantage over SMEs because of their structure, credibility in the market and easy access to funding. The limited access to financing by SMEs usually impedes their productivity and growth. Evidently, SMEs face credit discrimination from banks because of opacity their information, lack of structure and it is quite common that these SMEs do not have in place audited financial statements. For these reasons and more, it is usually difficult for SMEs to show credit quality to banks and other financial institutions. So, SMEs are seen to constantly experience financial constraints, and they experience more stringent credit terms than the large companies, which are seen to be less risky.

Access to finance can give SMEs the chance to develop their businesses seamlessly and acquire better technologies for production, therefore ensuring their competitiveness. However, funding has remained one of the key SME internal issues that keep confronting most enterprises in Nigeria today. To substantiate this perennial issue, an opinion poll was conducted SMEs in Lagos State- (Computer Village Ikeja, Alaba International Market and some market associations (Auto Spare Parts and Machinery Dealers-ASPAMDA and Balogun Business Association) the findings also revealed one of the main constraints faced by SMEs to be lack of access to finance. Typically, most of the respondents cited funding and access to finance as the most important constraint. About 79% of small firms cited a lack of finance and access to financing as the main constraint to their business growth. That means only 21% of them have access to required funding for the development of their businesses, and this crucial enabling factor is difficult for SMEs to access. Consequently, the access to the necessary financing or credit required to expand and continues to perform business operations, growth, innovation and employment will be affected greatly.