Exploring Impact Capital As A Funding Option for SMEs

There are challenges in accessing capital from financial service providers experienced by Small and Medium Enterprises (SMEs) due to barriers like collateral and lengthy documentation requirements in compliance with banking regulations. It is therefore not a surprise that the financing gap in Nigeria for Small and Medium Enterprises stands at $158.1B, with unmet loan estimates put at over $32B. Even when small businesses scale through the difficult loan eligibility processes, the interest rate repayments are often too high to sustain their enterprises. Impact Investment is becoming a more appealing funding option due to these obstacles in taking traditional capital.

 

The Global Impact Investing Network (GIIN) defines impact investing as “investments made to generate positive, measurable social and environmental impact alongside a financial return.” These investments happen when funds are deliberately channeled into enterprises that pursue a triple bottom line – the propensity to generate financial, social and environmental impact. The landscape for Impact investing is growing with the Business Research Company reporting that the global impact investing market grew from $420.91 billion in 2022 to $495.82 billion in 2023, representing a compound annual growth rate (CAGR) of 17.8%. There is therefore a shift from private charitable giving to investing in impact financial instruments such as debt, private equity, public equity, and equity-like debt, which brings much-needed returns to the investor. Capital suppliers have realised the benefits of championing impact investing, which provides better outcomes for their stakeholders and shareholders by addressing problems identified in the Sustainable Development Goals. Some of these challenges are in the areas of education, gender equality, poverty, financial inclusion, etc.

76% of the World’s wealth, according to the World Inequality Report, is in the hands of just 10% of the global population. This is a clear indication of the potential that lies in advocating for more capital flow from this pool held by private individuals to address the glaring lack that the majority, especially in the global south, face, which Government or Formal Financial Institutions are limited by bureaucracy or funding challenges to address. The Norrsken Impact 100, which is a 2024 list of Norrsken partners, shows there is a large flow of capital into innovative solutions and businesses to solve some of these social problems. This is evidence that impact capital may be the much-anticipated option to businesses that target the world’s challenges without the high profit margins that attract commercial capital, especially for a country like Nigeria, where SMEs' contribution to GDP stands at 46%. Impact Investing is intentional about promoting transparency and accountability so funds are properly utilized with an expected below-market-rate return to the Investors. Unlike charity, which is based on donations, impact capital includes concessionary funds or blended finance with impact measurements put in place to report on proper fund utilization for transparency and accountability.

Promoting more impact investments will require partnerships and collaborations among stakeholders. Governments have the responsibility to create an enabling environment to support and unlock more impact funding, even as traditional aid is depleting with the shutdown of USAID and other countries opting to reduce allocations for foreign grants. This could be through legislation, tax rebates for companies that choose to invest in impact capital instruments or relaxing strict regulations on long-term funds like pension funds. Currently, regulatory bodies in Kenya, Nigeria and South Africa have recently made adjustments to reflect access to pension fund allocations towards priorities such as affordable housing. GSG Impact in their August 2024 Report, recognised Impact Investors Foundation (IIF)’s National Board for Impact Investments (NABII) efforts in promoting partnerships and identifying regulatory issues around financing gaps to access finance among SMEs in the key priority areas of Health, Education and Agriculture through Edutech, Health tech, Justice tech, Fintech, Mobility tech,

There is also a rise of impact entrepreneurs; some refer to social entrepreneurs who champion solutions to these pressing issues as innovators. A lot of examples abound of these men and women who are re-creating what a traditional business operation is, developing new enterprise eco-systems that conventional financial systems may not fund, even though they are profitable. These businesses are at different stages of growth right up to sustainability. They are also classified as Small and Medium Entrepreneurs as their business model is guided by Professor Muhammad Yunus' 7 Principles of Social Business, which are;

• The business objective will be to overcome poverty, or one or more problems (such as education, health, technology access, and environment) which threaten people and society; not profit maximization

• Financial and economic sustainability

• Investors get back their investment amount only. No dividend is given beyond the investment money

• When the investment amount is paid back, the company's profit stays with the company for expansion and improvement

• Gender sensitive and environmentally conscious

• Workforce gets market wage with better working conditions

• Do it with joy

Impact Investors Foundation’s Mapping and Analysis of Enterprise Support Organizations (ESOs) in Nigeria report uncovers critical insights and practical recommendations on innovative financing that can unlock more of Nigeria’s economic potential through the business innovation of SMEs. The Global Impact Investing Network (GIIN) in its 2023 report shows that investors plan to step up their capital allocation to emerging markets, with sub-Saharan Africa attracting more than half of these investments. Investors are beginning to see the continent as filled with several opportunities that give good return on investments and this is steering more innovative capital flow into countries like Kenya, Egypt, Nigeria and South Africa to close the pre-COVID 19 $2.5 trillion to $4.2 trillion post- COVID-19 pandemic funding requirement to achieve Sustainable Development Goals (SDG). There are now more than ever other sustainable funding options available for SMEs to choose from for their business.

-Ucha Unimke-Ulayi
 

Driving the Ubuntu Spirit in the Nigerian MSME Ecosystem - The Nigeria Enterprise Support Organizations (ESOs) Collaborative

“Umuntu ngumuntu ngabantu” is a phrase many do not know...” I am because you are” is the interpretation that many are coming to identify with as the “ Ubuntu Philosophy”. Ubuntu is the South Africa now Global expression that encompasses what many now see as a new dawn of focusing on the common good and collective interests for all! This is the basis on which for the past few months Impact Investors Foundation (IIF) has been able to build a collective of service providers in the Micro, Small and Medium-sized businesses (MSME) space comprising of Management Consultants, Financial Advisors, Legal Firms, Business Development Experts, among others, who are all providing support services in their different capacities. The word “Collaborative” speaks to two or more working together for a purpose. We have gone beyond just building partnerships to leveraging each other's strengths to bridge the gaps in the MSME sector!

The Nigerian ESO Collaborative’s goal is to ensure long-term success in supporting member organisations and stakeholders. This is through our network of enterprise support organizations including incubators, accelerators, innovation hubs, consulting firms and other organizations that provide services to enterprises particularly Micro, Small and Medium-sized businesses (MSMEs) and startups under a network. These MSMEs play a pivotal role in driving economic development, fostering innovation, and generating employment opportunities within the country. Enterprise Support Organizations (ESOs) provide essential resources like access to capital and other forms of enterprise technical assistance/support that contribute to MSMEs’ profitability and sustainability. Hence, improving the coordination, quality and quantity of enterprise support is crucial to building an enabling environment for sustainable businesses to thrive in Nigeria. The IIF is contributing significantly to the development of a viable and cohesive ecosystem for enterprise support in Nigeria.The Collaborative recognizes the critical importance of collaboration in achieving organizational objectives, delivering exceptional support services and developing the ecosystem. By leveraging the strengths and resources of each enterprise support organization within its network, the Nigerian ESO collaborative is creating a more effective and holistic support ecosystem for businesses.

The landscape of business support and technological advancements has evolved  as the MSME sector is facing one of the most challenging seasons known in recent history; struggling to survive worsening economic challenges triggered by high inflation, increasing cost of living etc. This is the best time to leverage on partnerships and the “ spirit of togetherness” as PwC’s recent MSME Survey 2024 put it “ collaborative Eco-systems are important to enhance collaboration and networks. The shared resources and knowledge exchange that the Nigerian ESO Collaborative has been able to curate has been very valuable to strengthening synergies, mobilise and optimise resources, and elevate satisfaction across the Nigeria enterprise development landscape.

Our ESOs serve as catalysts for entrepreneurship and business sustainability, providing critical resources, mentorship, networking opportunities, investment-readiness and invariably, access to funding to empower enterprises at all stages of their growth journey. Entrepreneurial Support Organizations (ESOs) are also helping bridge gaps by offering guidelines on investor expectations and providing capacity-building support in the investment landscape. The obvious disconnect does exist; between investors and entrepreneurs in attracting investment-ready enterprises that have the business structure to take on investments, thrive and return back  ESOs in adopting this “ Ubuntu” Philosophy are leveraging on their network to share knowledge and best practices, improve their organizational performance and support services, build stronger networks, mitigate mutual risks, present a unified voice for advocacy, and reach a larger audience. Ultimately, these partnerships lead to more efficient use of resources and more significant, sustainable valued outcomes for all stakeholders.