5 Critical External Factors Behind SME Failures in Nigeria

The Nigerian business landscape is full of uncertainties and SMEs are the worst hit sector. In this article, we delve into the 5 critical factors behind the failures of SMEs in Nigeria, shedding light on the key obstacles that entrepreneurs and business owners must navigate to achieve sustainable success. Though the business failure rate is high, vast population, growing middle class, and natural resources, Nigeria holds enormous potential for SME growth and success. However, beneath the surface lies a myriad of challenges that have contributed to the failure of numerous businesses across the country. 

Why do SMEs fail in Nigeria? In this post, we have identified  5 critical external factors behind SME failures and have preferred recommendations to help you navigate this tough tide. Let’s have a closer look at the 5 critical external factors:

Poor Infrastructure and Power Supply: The Silent Business Killer

Nigeria’s infrastructure deficit has been a longstanding issue that continues to hinder economic progress and business operations. Inadequate transportation networks, Power and Energy supply, and expensive and unreliable telecommunications are among the most critical infrastructures. Chief among the most pressing concerns is the erratic power supply and highly expensive petrol and diesel costs that currently plague the nation.

The energy crisis in Nigeria not only leads to operational disruptions but also significantly inflates operational costs. Businesses often find themselves relying on expensive alternatives such as generators, which eat into their profits and hamper their ability to invest in growth-oriented activities. Manufacturing firms, in particular, struggle to remain competitive due to high energy costs and the need to invest in backup power solutions.

From aviation to manufacturing, all industries and sectors in Nigeria are prime examples of this challenge. For example, the textile industry, once a thriving sector and huge employer of labour, is now comatose, due to excessive energy costs. As a result, Nigeria’s textile industry, which was once a major contributor to the economy, has suffered a significant decline, leading to job losses and reduced foreign exchange earnings.

Regulatory Challenges and Bureaucracy

The Nigerian regulatory environment has long been criticized for its complexity and opacity. Entrepreneurs and business owners often find themselves entangled in a web of licenses, permits, and taxes, which not only deters potential investors but also hampers the growth of existing businesses.

With 7.5% VAT charges and the high cost of obtaining licenses and permits, coupled with the prevalence of unofficial fees, creates a hostile environment for startups and SMEs. Many small businesses are unable to afford the regulatory expenses, leading to a lack of formalization and missed opportunities for growth. Bureaucratic red tape further exacerbates the problem, with long delays in obtaining necessary approvals hindering timely business operations.

In the technology sector, for instance, the process of obtaining licenses and approvals for new innovations can be slow and cumbersome. This has discouraged tech startups from fully realizing their potential and has even prompted some to seek more favourable business environments abroad.

Access to Capital and Funding: The Elusive Dream

Difficult access to capital is one of the 5 critical factors behind SMEs failure in Nigeria. Securing funding has consistently ranked as one of the most challenging aspects of doing business in Nigeria. While access to capital is essential for startups and growing SMEs to expand their operations, the reality is that many entrepreneurs struggle to secure the necessary funds.

for example, the Central Bank of Nigeria recently hiked its benchmark interest rate to 18.75%. Though some government-owned institutions can give single-digit loans, demanding requirements by development banks like BoI and the Development Bank of Nigeria (DBN), make it nearly impossible to access the funds.

Also, Venture capital and angel investor networks, which are critical for early-stage businesses, remain limited in Nigeria. This forces many startups to rely on personal savings, family and friends, or bootstrapping, all of which can hinder the scale and pace of growth. Even when funding is available, the terms can be unfavourable, with high interest rates and collateral requirements that put undue pressure on entrepreneurs.

The impact of this funding gap is felt across various industries. The agricultural sector, for example, faces challenges in accessing the capital needed for mechanization and modernization. This limits productivity gains and prevents the sector from fully contributing to food security and economic development.

Corruption and Unstable Political Environment: Undermining Confidence

Corruption remains a systemic issue in Nigeria, seeping into every facet of society, including the business world. Bribes, kickbacks, and extortion have become unfortunate norms in business dealings, creating an environment where unethical practices are difficult to avoid.

The impact of corruption on businesses is profound. Honest businesses are often at a disadvantage, as they struggle to compete with those that engage in corrupt practices to gain an unfair edge. Furthermore, the unstable political environment and the associated policy uncertainties can disrupt business operations and deter potential investors.

The oil and gas industry, a key sector in Nigeria, is a stark example of corruption’s impact. Mismanagement, embezzlement, and opaque deals have plagued the industry, leading to significant revenue losses for the government and undermining the sector’s potential to drive economic growth.

Inadequate Market Research and Planning: Setting Up for Failure

Even in an environment with optimal infrastructure, supportive regulations, access to capital, and minimal corruption, inadequate market research and planning can spell doom for businesses. Understanding consumer preferences, market trends, and competitive dynamics is essential for developing products and services that resonate with customers.

Many businesses in Nigeria, however, fail to conduct thorough market research or create comprehensive business plans. This lack of preparation often results in businesses offering products and services that fail to meet consumer needs or failing to differentiate themselves in a crowded market.

The fashion industry serves as a pertinent example. Without a deep understanding of changing consumer tastes and preferences, many fashion businesses have produced clothing lines that remained unsold, resulting in financial losses.

Conclusion: Navigating the Nigerian Business Landscape

In the face of these critical challenges, it is important for aspiring entrepreneurs and business owners in Nigeria to approach their ventures with eyes wide open. While the obstacles are substantial, they are not insurmountable. Collaborative efforts between the government, businesses, and stakeholders are essential to address these issues and create a more conducive business environment.

Initiatives aimed at improving infrastructure, simplifying regulations, fostering access to funding, combating corruption, and promoting market research and planning can collectively contribute to a more favourable ecosystem for businesses to thrive. With determination, strategic thinking, and a commitment to excellence, entrepreneurs can navigate the complexities of the Nigerian business landscape and build resilient enterprises that contribute to the nation’s economic growth and prosperity.