Perhaps the most publicized problem of the small-scale businessman is the inadequacy of capital funds. This problem is further aggravated by institutional bottlenecks, which limit the accessibility of equity capital to local businessmen. Financial institutions, especially the banks, operate under such stringent rules that seldom favour the new small-scale businessman.
Usually, banks require financial and legal documentation as well as acceptable collateral prior to sending funds. Those requirements are often difficult for the small-scale businessman to meet. Also, banks prefer to lend "short" and in favour of large corporate borrowers whose risk of default is deemed to be relatively low.
Long term and equity investments, where they exist, constitute a negligible portion of banks' portfolio. This high preference for liquidity runs counter to the long-term capital requirements of small-scale enterprises.
For example, in Nigeria, only about 35% of the economically active population is serviced by the formal financial system while 65% is serviced by the informal financial sector such as friends, relatives, money lenders, credit unions and non-governmental organizations.
Many small-scale businesses are unable to benefit from the formal financial system due to inability to package requests for funds properly and lack of acceptable collateral. But while the informal sources of funding might have sufficed for highly localized and very small operations, contemporary small-scale businesses demand less volatile sources of external funding.
It is worthy of note that small-scale enterprises hold an enormous potential to impact the economy positively in spite of their inherent limitations. Hence, government should look into making funds easily accessible to the small-scale businessman. Government should also expand the financial infrastructures and instituting finance policies that would favour the small-scale businessman. Non-governmental organizations on the other hand are encouraged to venture into micro-business funding of some sort.
First published on my blog here...
Awesome