INTERVIEW (Andrew Alli, Immediate Past President and CEO, Africa Finance Corporation (AFC))

SME Funding: Sources/Options and Positioning Strategies for MSMEs

The Fidelity SME Forum is a weekly radio programme organized by Fidelity Bank Plc to educate, inform, advise and inspire budding entrepreneurs in Nigeria with knowledge and expertise that will enable them build sustainable and successful businesses. The interactive radio programme features subject matter experts and model entrepreneurs as guests on a weekly basis to share their insight and unique success stories. In this interview, Andrew Alli, Immediate Past President and CEO, Africa Finance Corporation (AFC) gives valuable insights on “SME Funding: Sources/Options and Positioning Strategies for MSMEs”. 

Q: At the African Finance Corporation (AFC), what did it take to raise funding for Nigeria and Africa in a time when people said it was impossible?

Andrew: Over the life of the AFC, we grew the size of the balance sheet from a billion to about 4.5 billion, which in effect meant that we raised about 3.5 billion of funding from various sources. I think the first thing in terms of raising funding is willing to take time as a borrower or investee to think about who are the various sources of funding that are potentially available to you and what do they want. Borrowers often understandably focus on what they want — loan, equity, etc — but they don’t often focus on who are the people who are going to give me this money and what are they looking for and how can I offer that to them. This can be different things: What sector? What sort of deals are they looking for? What sort of size of investment? What are they looking for in terms of comforting security that they will get their money back? How can I adapt my offering to them to assure them of those things that they are looking for? The truth is that we didn’t start borrowing money from day 1; we took time to go around various parties to understand what they were looking for. We also presented ourselves in a nature that we came back later on to show that what we had told them we would do were actually done. That then started to give them confidence that the promises that we made, we will adhere to them going forward. That’s what started to give the comfort for these guys to come and invest money in us. Rome wasn’t built in a day. You should start slowly to seek funding from investors; you start with small amounts and then you build it up. The first loan we had was a 50 million dollar loan. By the time I left, we’ve been raising Eurobonds of up to 750 million dollars.

Q: How were you able to demonstrate, with the AFC, to international and local investors that there is still potential in investing in Nigerian start-ups and SMEs?

Andrew: First of all, most of the investors you are dealing with are not stupid. One of the first things you have to do is to be very open about the risks and the issues that are facing you; these guys know it anyway. When you come and meet people who are looking for money and they pretend that nothing could possibly go wrong, that you would always get your money back, they instantly lose credibility. I think one thing is to be very honest, but to always highlight your own strength. Acknowledge weaknesses, but also always have a reason or a defense against those weaknesses or what you are going to do to mitigate those risks. That’s why before you run off to start looking for money, you should take some time to really sit down and understand the environment that you are going into, who the funders are and what their own levers are so you can address those things.

Q: Debt vs Equity: How do you wield these two as an investor and an investee and what would you advise at different stages of business growth?

Andrew: This is one of the issues you see very often, particularly around SMEs and in Africa — the question about ownership risk, debt and equity. People who are giving you debt expect to be paid back 99.9% of the time. What people don’t understand is that people that are lending money to you borrowed the money that they are lending to you and their own business models are such that if only 5% of that is not paid back, they are also losing money. Borrowing money is something that you are supposed to do when it’s quite safe to do so in terms of you having the cash flows to pay those back. Equity is able to take more risks, because you are not legally obliged to pay back on any time frame. But, of course, those guys are expecting some sort of return, because they are not doing it on a charitable basis. Obviously, it represents some degree of ownership in your business. If you are taking equity, what it means is that you are sharing ownership in the business and people often don’t like that, because in a way it’s a permanent situation and it also means that you are giving up some degree of control and autonomy. This is why people often raise debt. You can raise too much debt and run into trouble trying to pay back. The balance of this is that when you are starting up your business, you typically have no or uncertain cash flow that is dependent on one or two customers. At that point it is risky to take on loans. You should take up loans a couple of years into starting the business when you have more cash flow.

Q: The Nigerian financing landscape has evolved significantly; what do you think are the new opportunities for SMEs in terms of financing?

Andrew: The whole sector of microfinancing didn’t exist a while ago. Nowadays, with financial technology, people can run algorithms on you to find out how likely that you will repay the loans they give you, so they are able to give you loans without collateral. There are a number of organizations, like the Development Bank of Nigeria (DBN), which have access to over a billion dollars that they can put into loans, that are trying to learn lessons from the past on how to have a positive and sustainable impact on the SME sector in Nigeria. What the DBN is doing is that it is working through other financial institutions, like commercial and microfinance banks, for on-lending to SMEs.

Q: What would you say to those people wondering how they can access these funds?

Andrew: While there is a lot more money available now than in the past, when you compare it with the size of the Nigerian economy today, it is still a scarce resource. You have to realize that money funding is a scarce resource. In terms of being able to access these funds, the first step should be to formalize your business. You need to have proper records, proper accounts and decent track records with financial institutions. Capacity building and training is also very important, in order to be able to take funding and repay it in a proper way.

Q: Do you see a future when the Fintechs become major competition for microloan disbursement?

Andrew: I would say that what Fintech allows is for you to do things with zero or very small operating costs. It also allows you to use things like deep learning and artificial intelligence to glean knowledge from the information that was there in your business. However, one thing that I haven’t seen too much of yet is Fintechs aimed at what is called the liability side of banking. When banks lend money to you, that’s called the asset side. Most Fintechs I see are all about how to lend better, how to give out more money and how to do credit scoring. There are very few around that deal with how banks gather deposits — the liabilities — that they lend. Banking isn’t really about giving out money, it is actually about how you accumulate the liabilities. Until we see much more Fintechs on the liability side, I think it’s going to be more of an adjunct to help banking institutions rather than to replace them or to disintermediate them.

Q: What is your take on the fear that more money in business gives rise to more risks?

Andrew: This is where being financially self-aware is important. Most people complain that businesses have too little money, but it is also possible for businesses to have too much money. People who give you money expect something back, they expect their money back, with interest or a return if it is equity. You don’t want to take too much money that you are now essentially wasting the excess money.

Q: What is your final word to SMEs regarding financing?

Andrew: Try to ensure that your operations are as efficient as possible and reduce the amount of financing that you need by managing your cost will make you look like a more responsible organization and allow you to access more money.