Small and Medium-sized enterprises play a significant role in a country’s economy, especially in emerging markets where they represent 90 percent of all businesses, 66 percent of all jobs created, and 50 percent of the world’s GDP.
Sadly, data from the World Bank indicate that the annual SME credit gap in Sub-Saharan Africa is about US$330 billion.
This is because lenders often neglect these enterprises due to a variety of reasons which include:
Lack of consistent cash flow
Banks often favor businesses with a steady revenue stream and consistent cash flow coming in every month.
This means that it may be difficult for a startup to access a bank loan because there is no guarantee that it would bring the money back.
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Lack of Collateral
To succeed in the loan application process, businesses must demonstrate assets that can be turned into cash to make payments on business loans.
While collateral may not be a problem for large businesses that own property or other big-ticket assets, it can be an insurmountable hurdle for small enterprises.
Debt-to-income ratio
Who would go ahead to lend to someone unable to settle past debts? In many cases, banks won’t even consider lending to a business that has unsettled debts from other credit providers.
Obtaining credit from multiple lenders can be a major strike to a business when applying for a loan or cash advance from a traditional bank.
Having a good credit history is a priority for banks when granting a business loan application.
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Customer Base
Traditional banks want to see a strong customer base to lend money to a business. A strong customer base entails regular and diversified consumers.
For a startup, showing that you have some strong customers lined up might make a good impression on the lender.
Lack of management and Documents
Banks may not be comfortable lending to a business that does not have a strong, experienced management team to add their help to make the business grow.
In addition, the business should present operating documents to the lender to convince them to process the loan.
Some of the documents banks require include business ownership proof, bank statements of the last six months, and financial documents, among others.