Banks and other financial institutions regularly request financial statement of business organizations to back their requests for facilities. In most cases these are not available because most SMEs do not prepare annual accounts, thus resulting in loan rejects
By Charles I. Nwokolo
Most Entrepreneurs establish their businesses for various reasons ranging from profit motivation, need to create a secure financial future, solve problems, offer benefits to contributing towards societal growth and development. They enthusiastically register and start operations only to discover later that they require more funds but do not have it to keep the business running as both anticipated and unanticipated events throw up fresh challenges along the path.
Finance is very important to an organization both in term of sourcing and utilization. The objective is to assess the needs of the business properly and source the funds. Funds may be sourced to improve production base or services, providing means of payment for the organization’s Bills, manage cash position to guarantee liquidity, business expansion, introduction of new product etc. If the funds are not available when required the business will suffer and the profitability of the business is affected.
Funds can be sourced from Commercial Banks, the most important sources of capital available to SMEs for short term Loans. The Loans are self-liquidating from the proceeds of Sales. Many of such Loans are secured by the general Credit of the business, assets of the business, the firm’s Principal Guarantee or the Cash Value of life insurance.
Not seeking Financial Support
Their unwillingness or inability to access financial support from banks, and constant loan applications rejects arise from such reasons such as credit history.
Most of the SMEs do not have credit history or collateral to support loans request.They need to open and operate business Account to which all business income should be paid, and all business expenses properly recorded, captured and passed to the account. The inflows and outflows of funds will provide some measure of credit history. The turnover in the Account will help in determining bank support if facility is needed.
Cost of Funds
The high cost of capital also account for the unwillingness of most SMEs to seek bank facilities. It is believed that interest rate is prohibitively high ranging from 25% to 35% depending on how banks perceive the riskiness of the loans and few SMEs can survive any rate above single digit in the midst of harsh economic environment.There are other sources of finance where rate is relatively low and accessible to SMEs. They are Bank of Industry (BOI), Bank of Agriculture BOA), SMEDAN and some Agencies of State Government which provide business Support. With sound business case they can easily get financial support at favorable rate of interest.
Enterprises are established for the purpose of carrying business with a view to making profit. When an enterprise makes no profit or insufficient profit or losses it will not be attractive to investors and bankers for credit facilities as it can neither cover its operating expenses nor meet creditor’s obligations
No Visible Structure
Management and right leadership is as important as financial resource. Without sound management team, banks will be reluctant to advance credit to a business even when other factors appear to be favorable. For a business to function properly, it is important that the Management or Chief Executive Officer structure the business and staff it with relevant manpower and ensure that there is a policy on ground relating to use of resources, materials, machines and manpower.
There should be organizational chart where personnel and their responsibilities and lines of authority are clearly stated. With strong leadership team provided, the business can run efficiently whether or not the top management is involved in daily activities. The right structure will help to build trust and confidence in the business, secure financial future, maintain business continuity and develop to sustain future growth.
Not Rendering of Accounts
Banks and other financial institutions regularly request financial statement of business organizations to back their requests for facilities. In most cases these are not available because most SMEs do not prepare annual accounts, thus resulting in loan rejects. It is expected that management should regularly prepare and render accounts of their business which provide adequate information on the financial position, performance and cash flows that are useful for economic decision making process. Of course accounts cannot be prepared if there are not established structure of Accounts/Bookkeeping. Maintaining accurate records is key. It is the backbone of every successful business. With proper accounting report Banks will be in a position to assess and evaluate the solvency and liquidity status of the business to meet obligations.
Not developing Business Plan
Lack of well-developed business plan is like trading without direction. Business plan helps to determine, evaluate market for products or services, revenue and cost profile. It serves as a working document, provides marketing and growth strategy, risk assessment and mitigation, profitability, business evaluation purposes. Without it, you cannot manage and control your business activities.It is essential that start-ups develop business plan before commencing operations. They can project for profit or loss account, cash flows and have idea of income potentials given different scenarios. For an existing business which has no written business plan, it is vital to develop one. It can be reviewed from time to time or updated in line with changing circumstances.
Many start-ups and SMEs have obtained financial Support from BOI and others financial institutions on the presentation of professionally developed Business Plans.
Not Developing Annual Budget for Growth and Profitability
Enterprises are established for the purpose of carrying business with a view to making profit. When an enterprise makes no profit or insufficient profit or losses it will not be attractive to investors and bankers for credit facilities as it can neither cover its operating expenses nor meet creditor’s obligations. Many Loan requests are rejected by Banks on account of sustained Losses and Insufficient profit.
Generally, profitability of a business determines the operational continuity and competitive advantage in business.With budget, a company can plan the activities to be carried out during a given period. For new business, forecast can be made for sales, production, marketing, administration, and capital expenditure, cash, profit and loss account and balance sheet based on expected business activities and marketing efforts to be put in place.
For an existing business, budget is prepared based on the past financial statements and this depends on the accuracy of the organization’s financial statements.It is very important to develop annual budget because it guides managers in anticipating borrowing, debt repayment, operating expenses and short term investments. It also helps organization to plan for profitability, provide financial stability and achieve acceptable level of liquidity in the business.I have set forth some of the reasons why most SMEs are not taking advantage of Banks support for their businesses. Go through, review and see what insight may be gained and opportunity thereon for necessary action..
•Charles I. Nwokolo, a chartered Accountant, Chartered Banker & Management Consultant writes from Lagos. He can be reached via Consultant.cinwokolo@gmail.com
•Phone: 08030599774.
•Opinions, positions or thoughts expressed here are personal and strictly of the writer/author and do not represent the views of The Daily Crucible.
