Reasons MSMEs need to build relationships with banks

Despite the perception that banks only pay lip service to MSME funding, there are banks that earnestly seek to provide funding for MSMEs, but simply want them to meet their criteria.

So operators of these businesses do need to have a working relationship with their banks. Uzo Nduka, chief executive, Domino Information Company Limited (DICL) urges small business operators  not to wait till financial challenges crop up or till they need funds for expansion before attempting to get their banks to know how well their businesses have been doing. 

Nduka says, “Business operators need to sit down with their banks at the beginning of every year explaining their target performance in monetary terms even if they do not need a credit facility and call their bankers for a review of their business performance every quarter. But because many small business operators do not want to be transparent, they would not want to do that. Also, some bankers, particularly account managers are lazy and disinterested in the affairs of the business accounts they are supervising. They do not want to engage in the hard work it would take to work with a business account holder to ensure the business is doing well. This also brings to mind the capacity of the banker.” 

He however says if the business operator is willing to cultivate such banking relationship and the business account manager is also interested and has the capacity, then the latter would be able to recommend the business for a loan authoritatively when the need arises using the facts from the business’ track record in a couple years. 

Nduka believes this would go a long way in solving the problem of denying loans to even credit worthy businesses just because the rate of loan default by MSMEs is generally high. 

Credit history provided by credit bureaus is another way some business operators are able to develop banking relationships and could get larger credit facilities when they need it. Various business experts have urged MSME operators not to wait till they need a whooping sum of money such as N5 million or more before attempting to develop a credit relationship with their banks. They could avail themselves of other credit instruments such as overdrafts of about N100,000 more or less.  With a good track record of repaying before or right on time any credit facility they are given, they would have a credit history. 

To ensure that credit-worthy individuals and businesses would no longer have to suffer for credit-risk individuals and businesses, the Credit Bureau Association of Nigeria (CBAN) is being strengthened. 

At a forum in Lagos recently, experts in the credit bureau industry explained that in advanced economies, credit bureaus help consumers and small businesses obtain financing by offering timely, credible and objective information on individual and micro-borrowers as well as small and medium enterprises. This, according to them, allow lending institutions to reduce loan processing time and costs by 25 percent or more, while equally cutting default rates by 40 percent to 80 percent. These savings mean lower interest rates in these countries for SMEs, making credit more affordable  and available to those in need. 

Lanre Oniyitan, a finance consultant  said at the forum, “We have statistics that show that credit bureaus are the way forward. One of the key researches was done by the African Development Bank. Access to finance is higher in countries with private credit bureaus. Credit bureaus make things better for all of us.” 

These credit bureaus help individuals to provide reputational collaterals. During the forum, it came to the fore that SME businesses with good credit history at the credit bureaus can re-negotiate interest rates and get reduction from the 28 percent that small businesses are normally charged because they are perceived as high-risk borrowers. 

Nduka, the DICL chief executive however says credit history IS the easy way out because the credit bureau is the third party who takes responsibility for doing the work that the business operators and the bankers ought to have been doing.  “If the business has never taken a loan, how then do you know it has the capacity to repay loans taken if the banker has not been working closely with the business and keeping track records, should a good business then be denied loan if it does not yet have a credit history and no collateral?” For this business expert, businesses having relationships with their bank is the better option. 

OLUYINKA ALAWODE