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Making MSMEs Bankable Presented at the CBN 6 th Annual Microfinance Conference and Entrepreneurship Awards Abuja February 7 th – 8 th, 2012 by Lucky Onmonya.

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Presentation on theme: "Making MSMEs Bankable Presented at the CBN 6 th Annual Microfinance Conference and Entrepreneurship Awards Abuja February 7 th – 8 th, 2012 by Lucky Onmonya."— Presentation transcript:

1 Making MSMEs Bankable Presented at the CBN 6 th Annual Microfinance Conference and Entrepreneurship Awards Abuja February 7 th – 8 th, 2012 by Lucky Onmonya Institute of Development Finance and Project Management

2 Outline:  The Nigeria perspective of MSMEs  Contribution of MSMEs to development  Challenges for sustainability and growth  Factors that enhances MSMEs Bankability  How to make MSMEs Bankable  Mistakes to Avoid by start up

3 Concept of MSMEs in Nigeria CBN (N200 billion SMEs Credit Guarantee Scheme ‘SMECGS’ guideline, 2010) defined MSMEs as: An Enterprises with-  Asset base (excluding land) of between N5 million and N500 million.  Labour force of between 11 and 300

4 Concept of MSMEs in Nigeria- 2 SMEDAN – UNDP (National Policy on MSMEs, 2007) SizeEmployees Asset base (N million) excluding Land and Building Micro 1- 10Less than 5 Small 11- 495 less than 50 Medium 50- 19950 less than 500

5 MSMEs and Development EconomicSocial e.g. -Wealth creatione.g. – Poverty reduction - Industrial linkage - Employment - Saving mobilisation - Security Technological Management e.g. – Innovatione.g. – Skills development -Fabrication Marketing Finance production Contribution of MSMEs

6 But there are challenges:  Tough enabling environment  Weak entrepreneurial spirit  Weak managerial and innovative capability  Capacity to access credit and attract investment (bankability) is limited

7 Factors that enhances MSMEs Bankability. Bankable MSMEs Capability to tap opportunity Cash flow management Financial record keeping Innovation (value Added) Compliance with Legal requirement Revenue/ Collateral Management Team capability Entrepreneur character

8 Innovation/business opportunity  Capability of Tapping Business Opportunity: - Capability and ability to take advantage of opportunity created through innovation or business environment factors. e.g. embargo on import, latent demand.  Innovation/Value Added Capability: - Value added to products or services or methods of operation, distribution, etc through innovative capability gives competitive advantage.

9 Entrepreneur Personal Character/ Management Team Capability  Entrepreneur personal character and capability: -A demonstration of credit worthiness and wiliness to pay loans -Resilience and persistence when facing challenges -Open and cordial relationship with financiers e.g. bank  Management team expertise and commitment : -Skills and experience in finance, production, marketing, human resources, etc - A stable and committed work force

10 Legal Requirements /Adequate Financial Record  compliance with legal requirements : -Up to date registration with relevant agencies -Submission of returns e.g. relevant tax returns  Financial Records : Maintenance of adequate records in a transparent manner. Banks look at historical records-The profit and loss account, balance sheet, tax return, etc

11 Revenue or Collateral/ Cash Flow Management  Revenue/Collateral : A demonstration of an ability to pay debts from revenue instead of collateral.  Cash Flow Management: This provides an evidence of liquidity indicating solvency.

12 How to make MSMEs Bankable  Conduct a feasibility/ viability assessment  Develop bankable business plan  Prepare operating budget with emphasis on cash flow projection  Communicate business plan effectively  Secure a route to market  Invest significant personal fund  Registration with relevant agencies  Keep appropriate records and provide accurate financial statement  Develop good credit history  Maintain honest and transparent relationship with bankers/investors

13 Conduct Feasibility/ Viability Assessment  Feasibility assessment establishes whether the venture /project can be undertaken under prevailing technological, social, legal, economical and financial circumstances.  Viability assessment establishes the extent to which the venture can satisfactorily generate benefits that exceed costs.  These provide empirical evidence and it is a fundamental step in preparing a bankable business plan.

14 Prepare a Bankable Business Plan/Operating Budget  Professionally p repared to meet the needs of the bankers or investors.  Should contain the basic business ideas, opportunities, goals, objectives and strategies in areas such as production, marketing, finance, organisation, design, etc.  Address the concerns of the banker/ investors in areas such as: -Risks and returns -Payment of debts and interest -Management capability and dedication -Knowledge of the market and customers needs -Competitors activities etc.  Conduct operating budgets, sales, production, expenses, income statement and cash projection

15 Communicate the Plan Properly  Eliminate all barriers that hinder effective communication for the plan.  Languages use to describe the venture no matter the level of technology to be used must be simple, concise and understandable.  communicate effectively to show that the plan is realistic and attainable.  All ideas, strategies, supported models and computations must be articulated clearly  A poorly communicated plan no matter ‘beautifully’ prepared will have negative impact on bankability

16 Secure a Route to Market  Demonstrate – Good knowledge of the market. - Having access to customers’ base. - The use of appropriate channels of distribution and promotion method to improve market share and sales. - Competitive advantage. - Acceptability of product and price

17 Improve Management Capacity/Invest Personal Fund  Demonstrate management competence experience in form of: -Knowledge and skills -Experience -Commitment -Strong team relationship  Demonstrate commitment by significantly investing personal fund (own capital)

18 Maintain Correct Legal Status/Financial Records  Register business with relevant government agencies: -Business name/certificate of incorporation -Taxes: personal income tax, company tax, value added tax, etc. -Intellectual properties: license, copyright, patents, trademark. -Product registration e.g. NAFDAC- (food/Drug)  Maintain a proper accounting system : -Maintain appropriate books of accounts -Follow proper accounting procedure -Prepare financial statements -Periodic audit report is important  Seek assistance from lawyers, accountants or auditors )

19 Maintain Cordial Relationship with Bankers /Develop Good Credit History  Understand the way the bankers think  Be transparent and honest  Maintain a track record of credit worthiness  Start small by opening line of credit for a reasonable amount and pay it off as agreed, obtain again and pay off. The banker will be willing to give higher line of credit.

20 Mistakes to Avoid by Start Up-1  Preparing a business plan without adequate investigation.  Presenting complex business plan. This can create communication barrier  Vague business opportunity that show no evidence of real demand.  Incredible financial projection or developing projections that is inconsistent with other aspect of the plan.  Concentrate all effort on the development of product instead of other important elements such as how to access customer based.  Overestimation of sales revenue and poor cash flow management

21 Mistakes to Avoid by Start Up-2  Attempt to clean up the business only when there is opportunity for loan.  Window dressing the business.  Diversion of loans to other purposes  Relying on collateral instead of the business capacity to generate revenue to pay back loans.  Having a poor credit rating  Combining business cost with personal expenses  Having little or no experience and competence in the area of business  Doing business in a sector with high failure rate  Excessive remuneration and fringe benefits for the entrepreneur and top management

22 Conclusion / Way forward  The growth of MSMEs will benefit all stakeholders such as: -the banks (microfinance banks,commercial banks, development banks) -Professional advisers (lawyers and accountants, etc) -Donors and investors -NGOs -Regulatory /Advisory authorities -etc  Therefore, capacity of the entrepreneurs and management team should be improved continuously  MSMEs entrepreneurs must make effort to understand the needs and concern of bankers and investors  They should also develop long lasting relationship with bankers, investors.

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