SMEs urged on alternative credit access

Credit access. Banks are meant to deal with short term lending.

Access to finance remains one of the biggest problems that Small and Medium enterprises are grappling with on a daily basis. Most economic and financial analysts seem to agree that lack of affordable credit is largely responsible for small and medium enterprise (SMEs) stagnation and eventual death—normally occurring in the first 12 months of the business life cycle.

According to Professor Samuel Sejjaaka, in addition to 90 per cent of businesses that collapse in their first year of operation, only one per cent of the 10 per cent live beyond their fifth birthday, largely due to among others, shortage of working capital and alternative sources of sustainable finance.

This, according to the Makerere University Business school lecturer, Geofrey Bakunda, has been worsened because commercial banks have failed to structure affordable credits, compelling the SMEs to turn to money lenders—the loan sharks, whose lending rates are exorbitantly high.

To reverse that, he has joined other industry analysts and fellow academicians like Prof Sejjaaka, Prof Joseph Mpeera and Faisal Buyinza in rooting for alternative sources of financing other than the SMEs reliance on commercial banks and Microfinance institution.
One such alternative is business-to-business Finance (B2B) being fronted by Mr Bakunda, a Makerere University Business School (MUBS) researcher.

Unlike other forms of financing, he wants this method embedded in the national SMEs policy currently being drafted.
Business-to-business finance, according to the researcher, is increasingly being acknowledged worldwide as an alternative to formal finance, particularly in developing countries like Uganda where the lending rates are unreasonably high.

With B2B method of financing, large firms—who are the contractors in this case, accept to guarantee all the necessary payments that the SMEs would have incurred along the transaction chain.
This not only facilitates trade but also relieves the Small and Medium firms the trouble of borrowing from commercial banks whose lending charges are exaggerated.

“If B2B is well promoted, it will allow SMEs to grow, become competitive also significantly improve the business environment, including general reduction in the cost of formal finance,” said the Makerere University lecturer in his presentation at a policy dialogue last week in Kampala.

Already some forms of B2B financing, (namely sub-contracting, supply credits and prepayments and resource transfers) are being used though moderately.

Others like the financial and export credit guarantees are yet to be used. This is because of the entrepreneurs’ negative perceptions of the B2B financing methods and the large firms (TNC) outsourcing criteria that do not clearly present such financing options.

Speaking last week, Mr Richard Byarugaba, the managing director of the National Social Security Fund, argued that commercial banks’ loans are normally structured to deal with short term financing, explaining why their lending rates are in most cases a no go area for SMEs.
He said: “It will always be a struggle for an SME to repay a loan attracting about 25 per cent interest within a short time.”

According to Mr Byarugaba, SMEs have an option of mobilising long term financing through private equity, investment clubs, SACCOs, bonds and stock markets, among others, apart from just relying on commercial banks whose structures are short term rather than long term.

Mr Byarugaba, a banker by profession, said banks are meant to deal with short term lending of among others; operating capital, financing of debtors and creditors’ transactions.
But the good news is that banks have now reached a cross-road—they either make themselves useful or become irrelevant with time.

The Stanbic bank head of marketing, Ms Jackie Namara Rukare last week said banks are capable of providing financing according to the information they receive from the person seeking to be financed.

iladu@ug.nationmedia.com