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Doing Business with SME’s

  Jul 22, 2016
 

The Strathmore Business School, Invest in Africa, “Doing Business with SME’s” research reveals major trading misconceptions  SME’s and Multinational corporations have towards one another which greatly influence how they do business together as one of the factors inhibiting SME’s growth.

Inadequate access to financial services from financial markets due to high bidding requirements and stringent regulatory frameworks continue to plague SME’s as major inhibitors to growth, with the relevance of board governance and their effectiveness in adequately providing insights to businesses, indicating no significant rift between the performance of enterprises with boards and those without.

The research carried out between the months of April to June 2016; highlight the challenges faced by SME’s; managerial and operational, as well as their experiences in doing businesses with multinationals.

This was also to assess and inform the training needs of SME’s towards the development of a comprehensive training curriculum.

The research would also work towards fostering a conducive environment whereby Kenyan SME’s can grow and comfortably conduct business with multinational corporations.

Scope                                                                                                 

This study assessed 274 SME’s and 22 large corporations; 132 of the SME are located in Nairobi, 75 in Mombasa and 67 in Nakuru.

SME’s constitute 90% of the businesses across all sectors of the country. SME’s from the study are defined as enterprises with Kes 500,000 – 1 billion Kes turnover and have 10-1000 number of employees.

SME’s in the formal sector comprise 45% of the total source of employment and contributes to 35% of the GDP of developing countries according to World Bank.

Key Findings

There are many managerial/operational challenges that affect entrepreneurs while running their businesses. From the research findings, the following are stated as the most critical.

  • Debt collection challenges (30%)
  • High bidding requirements e.g. minimum deposits, turnover requirements (22%)
  • Lack of capacity to handle bigger jobs (18%)
  • Complicated and lengthy requests for proposals (21%)
  • Lack of capacity to identify new opportunities especially from large companies/MNEs (18%)

 

Entrepreneurs from all the levels of education face challenges in managing or seeking capital for their businesses. The most pressing challenge is high cost of financing/high interest rates (51%), followed by Access to financial markets (25%) and Fear of inability to repay due to uncertain business performance (23%).

The analysis also shows a trend of increasing rate of risk aversion (except for those with doctorates) as entrepreneurs enhance their academic qualifications. This is demonstrated by their disclosure of “Fear of inability to repay due to uncertain business performance” as most pressing.

Entrepreneurs who stated that they had a challenge in accessing Financial Markets by method of raising capital shows that those who find the above challenge most pressing are those who raised their capital from family (56%), followed by those who raised their capital from own savings (39%) and those who raised their capital from financial institutions (29%).

SMEs perceive that Large Corporations/MNCs consider several factors while dealing with them. Analysis shows that the most important factors are

  • Registration status of the business – whether registered or not
  • High quality products/services
  • Management and its integrity

From a large corporation perspective, respondents indicated the following as the key standard requirements they seek before engaging SMEs.

  • Adequate financial and technical resources
  • Capacity requirements
  • Competitive pricing
  • Location of the SME
  • Order fulfillment to satisfactory levels
  • Possession of expertise
  • Previous relevant experience
  • Quality of supplies to international standards
  • Registration and legal status
  • Reputation in the market and compliance with government requirements
  • Support to local content and former employees, and
  • Turnaround time in executing tasks.

 

The respondents from the large corporations indicated that SMEs readily express overwhelming interest in the tenders advertised by the large corporations. They further indicated that SMEs usually target small value tenders since most of them are usually in their start-up stages. The respondents indicated that SMEs shy away from large tenders due to the complexity involved in terms of technical and tough compliance requirements (e.g., bank guarantees) imposed by large corporations.

SMEs are plagued by a many challenges that hamper their growth. The research categorized these challenges in the following categories:

  • Financial
  • Regulatory
  • Training and business development
  • Managerial

The most pressing financial challenges are difficulties in accessing affordable finance, requirements by banks for collaterised land or property when granting loans and lack of enough funding to finance potential projects.

The result from the sample, however, doesn’t show much disparity between the SMEs with boards and those without. Does this imply that boards in SMEs do not handle their mandate adequately?

Recommendations

According to the study, most SME’s preferred a customized training approach which addressed sector specific challenges as compared to a generalized training curriculum.

Some SME’s also expressed interest in acquiring feedback from financial institutions regarding their performance in bidding for funding and on areas to improve on.

Financial markets should make bidding requirements sector specific in order to ease and improve the uptake of financial services.



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