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Is it good business to lend to Nigerian SMEs?

The loan repayment rate at Pennee and Payhippo is above 95%. In fact, Triift Africa claims 100% repayment rate from female-led SMEs it has supported. These lenders believe that it is good business to lend to SMEs in Nigeria. Why?

Access to funding seems to be the most difficult part of running a small and medium-scale enterprise (SME) in Nigeria, even when the funds are available, the interest rates are usually high.

"There are a lot of opportunities on the continent [Africa] but capital is very difficult to come by." — Tony Elumelu

For instance, Microfinance Banks reportedly charge as high as 75% per annum on loans, and digital lenders' interests can be over 30% per month. Then there are predatory lenders that sometimes out of desperation these entrepreneurs go to take loans from them since most commercial banks shy away from retail lending.

As of 2020, Nigeria's Small and Medium Enterprises Development Agency estimated that there are approximately 39.6 million SMEs in Nigeria with a population of 200 million. Compared to other developed regions with higher populations, it is clear that Nigeria has significantly more entrepreneurs than these other regions.

For instance, the United States has a population of 329.5 million, out of these numbers, the country has only 30 million SMEs—this means that only 11% of the US population are running SMEs compared to the 20% in Nigeria.

Over 95% of SMEs claim they need less than 350,000 ($745) in annual credit. However, with all the credit providers springing up there’s still just an approximated 2-5% penetration.

SMEs loan repayment rate in Nigeria

In Nigeria, digital lenders like Pennee and Payhippo are providing loans for SMEs in the country. As of February, Payhippo disbursed over $10 million in loans to Nigerian companies. "97% of all money disbursed over the past two years was collected," according to Zach Bijesse, co-founder of Payhippo. "The lowest [repayment] months were when covid was starting in early 2020: Our collection rate dipped to 93% in March 2020."

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Disclosure: This article was inspired by Zach's story about Payhippo. We tried reaching the team but we learnt that Payhippo is on a media break, as of the time of this report. So, we spoke with other experts in Nigeria's SMEs lending space.

"It is good business to lend to SMEs, mostly because many lenders are not enthusiastic about lending to small businesses but there are several of them [SMEs] in the country," Mejero Emmanuella, CEO of Pennee said. Lending will likely be seen as bad business by the lender when the debtors fail to pay within the loan tenure without proper communication with the lender.

So far, Pennee has recorded a 98.7% repayment rate since its launch in 2019—this is slightly higher than Payhippo's.‌ Triift Africa, another credit provider in Nigeria claims that, it has recorded a 100% repayment rate.

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Loan tenure is the duration within which the loan is supposed to be paid off. It is the time that the loan will last until it is fully paid off with regular payments.

According to Mejero, "We think about repayment before giving out money to businesses. Also, repayment is most about the character to who you are lending. For Pennee, we use direct financing to determine who is serious with their businesses—someone cannot take money from us and put it into unproductive activities."

The company also provides mentorship to SMEs within their portfolio. Recently, Pennee deployed 25% of its $2.7 million in credit financing to its first small business accelerator cohort.

To ensure a seamless loan repayment process, Yemisi Isidi, co-founder of Triift Africa said that SMEs should "be forthcoming with clear communication."

"This helps us manage expectations and provide better support and advice on how to unlock new revenue opportunities within your business niche, position your business better or even optimise your processes for efficiency. Things can go differently than planned, but by communicating, you provide ample room for adjustments to payment plans," she added.

"At Triift Africa, we think of ourselves as long-term growth partners for businesses. For us, ambition actually counts. We know that great businesses and their brilliant plans may not survive the harsh business realities and the quickly evolving climes that they are operating in. So, we are always thinking about how we can support businesses through these challenges."

What SMEs should consider before taking loans

In approaching credit providers, it is important to have an existent business with good books. Mejero told Benjamindada.com that "it is hard for anyone to risk providing loans to you if you are unable to detail your track record, so businesses should pay attention to bookkeeping.

  • Be conscious of the lenders' terms: You cannot spend all the money you make on repaying loans, so you need to pay attention to the interest rates, reducing balance and the early/late payment fees.
  • Good behaviour: It is really important to keep good behaviour when you are approaching lenders. Repayment is most about the character of who you are lending to than their capacity. Lending is a relationship of trust!
  • Avoid predatory lenders: SMEs should avoid the bad actors, and one way to do that is to not think of credit when there is an emergency. As you are setting up your business, think about who your credit providers should be.
  • Keep up with your credit report: When you are dealing with standard financial institutions, if you have pending debts other institutions will not lend money to you. Always ensure you clear up any debt!

Related Article: Predatory lending in Nigeria—what is the way forward  

Businesses that access loans/credit facilities from us [at Triift Africa] are businesses that typically have skin in their own business. This could be your own personal investment as a founder, a clear effort or a plan you have to build something profitable. — Yemisi Isidi.

In addition, Isidi said that "having the right business and legal framework/structures can make it easy for you to access credit facilities from us. For example, If your business is not registered, or the founder doesn’t have clear boundaries like a business account or even the transparency to separate personal from business expenses, that can quickly become a barrier to accessing credit."

"Also, demonstrating strong community ties, especially your relationship with business communities can make it easier for a business to access loans. This could include who is willing to refer you, other loans that you have collected and if you have paid back and your customer experience. Your business relationships to a large extent define your credibility."

"You need to demonstrate a strong understanding of the problem your business is solving, how it plays in the market, potential risks and how to mitigate them. This is very important to know when collecting a loan so you are very clear about the problem you will be solving with the loan and how to pay back," she added.