Capital is an integral part of any business and is highly needed to keep a small or large business running. In sub-Saharan Africa, there are more than 44 million micro, small, and medium enterprises (MSMEs). Virtually most of these enterprises are micro-businesses run by one person, and these businesses need better capital sources and funding to keep their operations running smoothly. More than half of MSMEs need more funding than they can currently access. Because micro and small-sized businesses are the leading providers of employment in Africa, their access to capital plays a huge role in economic development and alleviating poverty.
The inability of most African MSMEs to access good capital sources and proficiently bridge the financial gap ultimately leads to administrative stagnation and breakdown. The potential of these firms as a good source of employment for youths is not fully reflected because of the financial barriers they encounter. The top African countries with the highest business shutdown rates include Ethiopia, Rwanda, Ghana, Zimbabwe, The Democratic Republic of the Congo, Tanzania, and Nigeria, with one of the reasons for shutdown being lack of capital.
Additionally, most African countries’ dire economic situation exacerbates the business capital shortage problem. However, most small business owners’ lack of entrepreneurial skills compounds the issue. Many operational mistakes, which affect business growth, stem from the attitude of entrepreneurs to work and their mode of running their various businesses. These mistakes can eventually lead to an ultimate capital shortage which contributes to the collapse of companies.
There are two main types of financial challenges that small businesses face. First is the issue of financial accessibility. Most informal and micro enterprises are not registered with the government, making it difficult to access traditional financing through banks since financial institutions require a business license or proof of registration. Businesses not legally registered with the government are considered informal, and Africa’s informal economy is vast. Moreover, even the registered small businesses still suffer from a lack of access to finance. An estimated 28.3 percent of registered small and medium-sized enterprises in sub-Saharan Africa face credit constraints.
The second issue most small businesses, formal and informal, the encounter is low financial affordability. Many enterprises do not have the total cost of capital or the amount to take out a loan or receive investments. The general loan cost includes interest rates or substantial collateral equivalents, which some firms find challenging to provide. In many banks, the interests are often double the digits of the original loan.
The causes of capital shortages for MSMEs have much to do with the owners’ and entrepreneurs’ lack of managerial or technical skills. Poor organizational skills include the inability to set a budget, create a marketing strategy, and create financial statements. These skills are essential to the success of small businesses and can impact their ability to access capital—this, along with a poor business environment, is not conducive for entrepreneurs.
Budgeting and marketing are vital skills that can help improve business operations, but many entrepreneurs lack the technical skills. Most MSMEs owners neglect to create an estimate of income and expenditure statement for their enterprises. In addition, many small and medium-sized firm owners commence business activities without adequate research and analysis. Proper budgeting and marketing plans will assist owners in focusing on cash flow, which helps improve profits, costs, and finance access.
Poor marketing efforts lead to a lack of sales revenue which can affect growth strategies. Digital marketing strategies can enable small businesses to reach audiences they previously could not access. Technology training can help MSMEs engage in digital marketing strategies.
Additionally, regular financial record keeping is a vital strategy to sustain a business and increase its chances of accessing finance. MSMEs need to inculcate the habit of consistently recording financial transactions. With regular reports and financial recordings, small firms can have a reliable performance measure. Small businesses can perform their record-keeping tasks without a professional bookkeeper using basic excel or other accounting apps that allow small business owners to record their cash inflow and outflow.
The lack of skills can be bolstered by entrepreneurs accessing capacity-building training that improves their skills. Some of the training services at KilSah Consulting are targeted at improving small enterprise owners’ managerial skills.
Implications of capital shortage for MSMEs
Difficulty in keeping ongoing business operations – The lack of capital that MSMEs encounter makes it quite challenging to keep their business operations running smoothly. Various important parts of businesses, such as insurance, rent, and salaries, cannot be completed without good capital or stable financial status. Some small and medium-sized enterprise owners resolve to close down their businesses due to the lack of capital.
Difficulty creating future plans – Without the availability of sufficient funding, small businesses find it hard to create plans. For small businesses to grow, they must be able to plan consistently. Hiring workers and purchasing additional assets are all activities that must be carefully planned based on available or projected capital. Most small businesses face a capital shortage, making it hard to make future projections.
Inability to create jobs – Entrepreneurship and MSMEs are an engine for job creation in Africa. Small businesses experience difficulty staying in business and growing due to a lack of capital, which inhibits their ability to create jobs. Over 200 million micro, small and medium enterprises cannot access the credit necessary to grow. It is challenging to fund businesses with personal capital, so many entrepreneurs look to other financing options like loans to run their operations. Access to finance is one of the top challenges that small businesses face, and once this challenge is addressed, it could help millions of MSMEs grow.
Banks often decline loan requests because of a lack of consistent cash flow, insufficient collateral, poor financial record, and poor credit scores. African small and medium-sized businesses that lack capital find it challenging to gain the trust of financial lenders and attract investors.
What Are Some Solutions For Increasing Access to Capital?
Government Credit Guarantee: A government credit guarantee can make lending to MSMEs more attractive by sharing the risks. The government’s backing can increase the number of loan funds available to a business beyond its own collateral limits because the guarantee is a form of loan collateral.
Specialized MSMEs Banks: Microfinance banks have been targeting small businesses, albeit with high-interest rates. More mainstream banks can target the MSMEs sector with the goal of being specialized banks for this sector. Specialized banks will provide loans mainly to MSMEs and provide training support to help entrepreneurs manage the loan.
Develop MSMEs Credit Database – creating a credit database will allow banks to improve their offerings to small businesses. A credit database would enable banks and financial institutions to gather and monitor MSMEs and evaluate their creditworthiness. Institutions can also use the database to provide managerial support in the form of training for small business owners, which will, in turn, reduce their credit risk.
Conclusion
Capital shortage easily impedes the growth and development of businesses. The number of MSMEs in the African continent keeps increasing day by day. Over half of the enterprises face severe capital problems, so achieving their full potential is difficult. The unfavorable government administration in some African countries is why many businesses in the continent face capital issues.
While some entrepreneurs contribute to the capital shortage problem, most of their contributions can be reduced with adequate managerial training to help with financial and marketing management. Additionally, to mitigate the issue of capital shortage, develop government credit guarantees, specialized banks for MSMEs, and a credit database. These solutions can help increase the operational efficiency of small businesses while helping to cut the access to capital gap small enterprises face.
