Dear small business owner…
Understanding the plight of young Nigerian business owners
Whether you have an invention or a skill you want to share with the world or you simply like the idea of working for yourself, there are plenty of reasons to pursue small business ownership. The average Nigerian between the ages of 18–35 has contemplated implementing a small business idea or will do so soon. This is primarily because of the massive lapse in readily available jobs. Thousands of graduates leave Nigerian tertiary institutions every year many of who remain without a means of income for the earlier parts of their post-university days. The unemployment margin in the Nigerian workforce is disturbingly high.
When it is hard to secure a job, it is commonsensical for the youths to earn a living by any other means available. This is one of the primary reasons for the increase in internet crimes amongst our young men and prostitution for the ladies. For those who have their focus on securing their livelihood through legal means, investing resources into a side hustle or small business is a viable option. This article seeks to address the barriers to entry for small business owners and how they can effectively jumpstart their businesses
and earn a living from whatever industry they are into.
It’s not easy to open a business in a competitive field. In fact, if it is too easy, you should question
whether it’s worthwhile in the first place, because you may end up in an overcrowded space.
Every new business should be aware that there would be barriers that will prevent them from breaking into whatever market niche they have chosen and those things are what helps established businesses keep a piece of the market share.
According to the world bank, 96% of businesses in Nigeria are SMEs compared to 53% in the US and 65% in Europe and contributing 1% of GDP compared to 40% in Asian countries and 50% in the US or Europe. What makes it hard to successfully start and run a business in Nigeria?
We examine some determinants of productivity, which include education of the labor force, access to infrastructure, access to finance, size of firms and other business climate variables. The dimensions of business climate variables are insecurity, lack of enabling environment, bribe or corruption, the amount of time that businesses spend dealing with government regulation, practices of informal activities, tax and trade regulations, etc.
Access to Finance
Insufficient commercial bank credit to SMEs is considered a factor that affects the growth and development of the smaller business sector worldwide. In Nigeria, this problem is particularly acute. According to the Central Bank of Nigeria, credit to SMEs accounts for less than 10% of commercial banks’ lending portfolios in the country.
The most recent enterprise survey in Nigeria showed that 59.3% of small firms and 34.8% of medium-sized ones considered access to finance to be a major business constraint, compared to just 10% of large firms. Owing to statistics from the Central Bank of Nigeria, the extent of credit provision to the sector has been quantified. The CBN annual reports show a steady drop in the proportion of total bank credit to small businesses over the last 20 years. In 1992, loans to this sector comprised 27% of all bank loans, but this had dropped to barely 0.1% by the end of 2013. There are several reasons that may account for the relatively high proportion of lending to small businesses in 1992 and the successive significant drop afterward. Prior to 1996, there was a regulatory requirement for banks to allocate 20% of total credit to small scale enterprises wholly-owned by Nigerians; this was subsequently lifted.
Financial exclusion refers to a situation where the poor and other disadvantaged groups are unable to access formal financial services, owing to their perceived vulnerability. Financial constraints are more pervasive in agriculture and related activities than in many other sectors, reflecting both the nature of the agricultural sector and the average size of firms. Financial issues top the list of disincentives for 55% of young Nigerians with a desire to run their own businesses. The financial service landscape of Nigeria is one that shows a lack of access to a range of affordable, safe and reliable financial services including credit and insurance. Research shows that 73.2 million adults representing 41.6% of the adult population in Nigeria are financially excluded. As a result, households and small businesses have traditionally patronized informal credit lenders some of whom charge higher interest rates and give short-term small loans.
Access to infrastructure
Recent studies support the idea that under the right conditions, infrastructure development plays a major role in increasing productivity, promoting economic growth and poverty reduction. For instance in Bangladesh, a 1% increase in households with access to electricity and paved roads in the villages led to a 0.8% increase in total per capita income respectively. The Nigerian power sector’s operational efficiency and cost recovery are among the worst in Africa, supplying about half of what is required. In the transport sector, Nigeria’s road networks are in poor condition from lack of maintenance, and the country has a poor record of air transport safety. As in most parts of Africa, mobility is severely constrained by a lack of transport infrastructure. To improve the productivity, profitability, and competitiveness of SMEs will require improvement and investment in public infrastructures such as roads, schools, hospitals, electricity,
transportation, and water.
Skilled labor
Education allows people to adapt more easily to both social and technical changes in the economy and to changes in the demand for labor. Education is often the most important foundation for people to pursue opportunities in new business, seek higher employment and migrate. Nigeria is noted for its poor quality of primary education as well as low levels of tertiary enrolment. About 40% of Nigerian children aged 6–11 years (about 4.7 million children of primary school age) do not attend any primary school with the Northern region recording the lowest school attendance rate in the country, particularly for girls. The problem for small businesses in Nigeria is not just poor levels of school completion rates but more importantly that of skills mismatch.
Other Business Climate Variables
Related business constraints that affect SMEs in Nigeria center on the political, socio-economic and legal ground rules within which businesses operate, including stable government, the time it takes in dealing with government procedures, property rights, and taxation, etc. Regionalism,
tribalism, sectionalism, and ethnicity are other major problems facing the Nigerian political environment. Among the major institutional problems that have impeded sustainable development in Nigeria is corruption which appears embedded in the culture. It is arguable that corruption constrains entrepreneurship by deterring entrepreneurs unwilling to engage in corrupt practices and encouraging unproductive forms of entrepreneurship.
Fear of failure is the percentage of people who perceive opportunities in the area in which they live yet to indicate that fear of failure or low self-esteem would prevent them from starting a business. Fear of failure can be influenced by intrinsic personality traits, as well as by societal norms, cultural barriers, government procedures, taxation, and other regulations. Suggestions to policymakers include to improve business environmental conditions in Sub-Saharan Africa include improvement in the physical infrastructure — power, transportation, water and broadband internet, especially in the more rural areas, reduce bureaucracy and red tape in starting a business. Make it quicker and less costly; implement incentives to encourage entrepreneurs to start new businesses and companies to invest in small businesses through internships and apprenticeships, etc. The arbitrary nature of government regulations and policies is another variable that might be a hindrance to business start-up or growth in Nigeria, a good instance is the ban of bikes on Lagos roads. Despite safety procedures developed by the bike hauling services in the city in their bid to solve mobility issues, they were forced to close shop pushing thousands of people back into the unemployment bracket.
Well, you shouldn't be gloomy, in fact you should be as happy as these young online restaurant staff above because digital technologies have bridged the gap between customers and businesses. Just as it has never been easier to start a new business, it has also never been easier to transform existing businesses into digitally-driven, adaptive enterprises focused on customer needs. To say it simply, the convenience that digital technologies bring to daily users has also empowered businesses with the tools to start, manage and grow with lesser hassle. To leverage digital technologies in business will make you. Digital technologies are lowering barriers to entry for many business people in various ways not limited to the list below.
Deep knowledge is easier to acquire
The knowledge that you used to hire or purchase is also freely available. Blogs, accelerators, mentoring programs, meetups, and other educational opportunities like online tutorials, none of which existed just a few years ago, now exist online and everywhere business is done, allowing newcomers to tap into expert knowledge, and adopters of new tools and systems to self-train and get to work faster.
Distribution is democratized
Sales, marketing and customer relationship management tools, supporting virtually every market category, can be found free with little more than a web search.
Removal of intermediate distribution layers has made reaching consumers simpler and provided a level playing field for upstarts both in the digital and the physical economies. For instance, E-commerce has done great good for sellers of physical products. As the web and application stores have done for intangible items like professional services and software respectively.
Digital finance
Digital solutions and new technologies offer great potential to overcome massive development challenges and already contribute immensely towards achieving the goal of universal access to financial services such as savings, insurance, or credit. Online banking has brought about massive improvements in financial inclusion both for households and small businesses. Digital finance also has an important role to play for small businesses. It not only provides them with access to financing but also to electronic payment systems, secure financial products and a chance to build a financial history.
For instance, Accion Microfinance Bank (AMfB) in Nigeria provides loans and savings products to low-income customers, many of whom are microentrepreneurs. AMfB hopes to triple the number of clients it reaches through a “digital-first” model to both acquire new clients and to make internal processes even more efficient. These changes aim to have a substantial positive impact on AMfB’s clients — both new and existing. Clients should have greater access to various financial products and services, and they’ll benefit from an enhanced customer experience and the convenience of being able to complete transactions without having to visit a branch.
For small business owners who need immediate financing, who don’t qualify for bank loans, or who want a financing product that’s not offered by banks.
Online lenders (sometimes called alternative lenders) provide many financing products, such as loans, invoice factoring, or business lines of credit.
how do online lenders differ from traditional banks?
Online lenders typically have streamlined application processes and fast approval times. With some products, such as merchant cash advances or invoice factoring, it may be possible to receive funds within 24 hours of applying or even on the same day.
Some online lenders have less stringent requirements when it comes to personal or business credit scores, amount of time in business, and your revenue.
The catch is higher interest rates and/or fees. Interest rates for financing products from online lenders can vary from approximately 5.49% to over 40%.
However, realize that your interest rate is going to depend on multiple factors, such as your credit score, time in business, average monthly revenue, and the amount of debt you’re currently carrying.
To judge the value of an offer, it’s important to consider other factors such as repayment terms and the total amount being offered.
Conclusion
A lot of businesses Nigeria die an early death because they lack guidance on ways to break barriers that stand between them and the much-coveted market share.
As a developing economy, the Nigerian business ecosystem is faced with unique challenges that make it more difficult to run a business successfully. Many young entrepreneurs have cited access to finance, infrastructure, skilled labor and various business climate variables as major pain points in their business development endeavors. Most notably is access to finance which buttresses the financial exclusion in developing economies like Nigeria’s. Research on this topic is continuously evolving because of the dynamic nature of the business environment. Fill out this survey to push the edge of this envelope further and add relevant data for a better understanding of the plight of the average small business owner in Nigeria.
