Problems of Business Finance in Nigeria

Problems of Business Finance in Nigeria – In one of Africa’s largest economies, Nigeria, there are so many business opportunities for entrepreneurs. There is great potential for growth and innovation within the business space here. 

However, starting and running a successful business here is not child’s play, especially when securing and managing finances are involved.

The business environment itself makes it difficult for businesses to remain profitable and competitive for a long time.

In this article, we will learn about the  common financial problems businesses face in Nigeria. Beyond that, we will also look at some practical solutions that can help businesses achieve lasting success.

Some of the financial problems of Business Finance in Nigeria include:

1. Limited Access to Finance
2. High Costs of Operations
3. Inconsistent Government Policies
4. Inadequate Support for Startups
5. Foreign Exchange Instability
6. Lack of Adequate Funding Options
7. Poor Financial Management
8. Inflation and Economic Instability

1. Limited Access to Finance

Limited access to finance is one of the most disturbing challenges being faced by businesses in Nigeria. For many business people, it is very difficult to secure a loan or investment.

Banks and other financial institutions usually have very high demands that most small and medium-sized enterprises (SMEs) cannot meet.

Even when the loans are available, interest rates are often too high, making it even more difficult for businesses to pay back without going through serious financial pressure.

Also, collateral requirements are another big deal. Many banks require substantial collateral like houses or landed properties. A lot of business owners are just grinding, trying to build their businesses from scratch and may not have these collaterals. As a result of this, they are disqualified from getting the loans.

Lastly, the application process is usually very overwhelming and tedious. So much paperwork and bureaucracy is involved especially for small business owners with little to no financial education.

Possible Solutions:

•  Microfinance institutions and fintech platforms should be encouraged to grow so that they can give alternative financing options to businesses.
• Also, government initiatives should look at improving credit access for SMEs through grants or low interest loans.

2. High Costs of Operations

There are many things that make it expensive to operate a successful business in Nigeria. These high costs then make it difficult for businesses to grow and do well.

Some of them include

1. Having to rely on generators because of the unreliable nature of the power supply. This leads to high fuel and maintenance costs and adds to the overhead cost of running the business.
2. Bad road networks in most parts of the country increase the cost of moving goods and services from the area of production to the areas of use. This affects the profitability of a business after subtracting these costs.
3. High cost of raw materials because of import duties and inflation, making it expensive for businesses to produce goods and maintain a high production quality for a long time.

Possible Solutions;

• One way to reduce overhead costs is businesses collaborate with local suppliers and use shared services.
• Businesses can look for technologies that save costs and energy.
• To provide relief for businesses, the government can subsidize utilities and give tax incentives.

3. Inconsistent Government Policies

When government policies are not consistent and predictable, it affects how the business environment is shaped. Unfortunately, in Nigeria, one day a policy is in favour of entrepreneurship, the next day it is not.

It is difficult for businesses to make long term plans when government regulations can change with little or no notice. This affects taxes, loans and grants, import duties etc.

Secondly, an unstable tax regime is another challenge because taxes can easily increase or new taxes be added to previous ones. This causes unpredicted financial stress on both the business owners and their business.

Possible Solutions:

• Business owners should advocate for policy frameworks that are more transparent and stable than the current reality.
• Also, they can communicate with industry associations and ask for consistent policies that will promote long-term investment and also reduce uncertainties in business.

4. Inadequate Support for Startups

Startups play an important role in the growth and innovation of every country’s economy, Nigeria included.

However, the sad reality is that there is only little support for startups in Nigeria. 

There is limited access to incubation and acceleration programs which are important in helping startups grow.

Many entrepreneurs don’t have access to mentors who can provide the guidance they need to succeed in business

Lastly, even though the government periodically comes up with initiatives, they are often poorly implemented and this makes it hard for new and existing businesses to survive.

Possible Solutions

• To give startups the resources and guidance they need the government can partner with the private sector to create innovation hubs for them.
• Incubation programs should be strengthened to achieve their goals. Also SMEs should be given access to mentorship and networking opportunities as well as early-stage funding.

5. Instability of Foreign Exchange

The fact that Nigeria’s economy heavily relies on exportation of oil makes it very vulnerable to fluctuations in global oil prices.

Because of this, the foreign exchange is very unstable and this affects businesses a great deal. How? You may wonder.

1. As the Naira depreciates, the general cost of improving foods and services becomes very high and this is not good for businesses that rely on imported materials.
2. There is also a struggle to access foreign exchange at official rates. Because of this, most businesses tend to rely on the parallel markets (also called black market) where rates are way higher, still increasing cost.
3. For businesses that are involved in international trade, the unpredictable nature of exchange rates make it difficult to plan and manage costs well.

Possible Solutions:

• I believe that if the government enhances foreign exchange reserves, improves trade balances and implement sound monetary policies, the foreign exchange market can be stabilized.
• Meanwhile, companies should diversify their income streams and hedge against currency fluctuations maybe by saving their money in hard currencies.

6. Lack of Adequate Funding Options

In Nigeria, many SMEs never see the daylight of external funding because there are only a few funding options available out there.

Most businesses depend on banks for funding and like I mentioned earlier, it is very challenging to secure bank loans.

There are very few venture capitals and angel investors unlike in more developed economies. This makes it difficult for strips to raise funds.

Possible Solutions 

• To solve the problem of funding, the range of financial products should be expanded so that venture capitals, angel investors, and crowdfunding platforms are included.
• Also, another strategy that will provide more funding opportunities is establishing policy reforms that encourage investment in different sectors of the economy.

7. Poor Financial Management

To build and grow a successful business, one must learn the skills of financial management but many businesses in Nigeria struggle with these skills.

Many business owners do not have the knowledge of accounting and financial management that they need to run a successful business. Because of this, they tend to make poor financial decisions.

Also, many business owners do not keep proper records and without this, its quite challenging to track income, expenses, and profits. This makes it difficult to make informed financial decisions or secure funding.

Possible Solutions:

• Financial education programs should be promoted so that business owners can learn effective budgeting, financial planning, and cash flow management.
• Also, business owners should implement good accounting systems and seek professional advice whenever they need to, so that they make better financial decisions.

8. Inflation and Economic Instability

Currently the inflation rate in Nigeria is about 34% in Nigeria which is the highest it has ever been and one of the highest in the world. This inflation and economic instability has a great impact on businesses.

Because the costs of goods and services are higher than before, profit margins are lower and therefore financial burden on businesses are higher.

Also, the economic instability makes it difficult for businesses to plan for the future or invest in their own growth

High inflation reduces the amount of money consumers have to spend on some good and services. This leads to lower sales for businesses.

Possible Solutions:

• To hedge against inflation, businesses can  adjust their pricing strategies, diversify their investments, and cut out unnecessary expenses. 
• The government should implement smart fiscal policies to stabilize the economy. 

Conclusion

There are several challenges standing in the way of business finances in Nigeria, like limited access to funding, high cost of operations, inconsistent government policies, inflation etc.

Even though these issues are tough, they are not insurmountable. It just needs some targeted solutions like increasing alternatives financing options, advocating for stable policies, and promoting financial education.

The government alone may not be able to sole all the challenges of business finances. Neither can the private sector on their own.

However, when these two combine efforts alongside financial institutions, a supportive ecosystem can be created for business to grow, innovate, and contribute to the economic development of the nation.

When these challenges are addressed, businesses in Nigeria will evidently thrive and succeed despite the global economy.