Besides severe infrastructural challenges, access to business finance is another factor that crushes the African entrepreneur. Ease of access to finance lubricates the wheel to entrepreneurial profitability. Its absence clogs the wheels. There are at least four reasons access to finance in Africa is challenging. The first is the high transaction cost environment, which shrinks prospective margins while enlarging the attendant risks. The second is the severe macroeconomic uncertainty, which makes business prospects bleak. The third is the high-interest rates and other associated charges that are its corollaries. The fourth is the penchant of financing institutions for the short-term as opposed to long-term credit. The inadequacy of entrepreneurship-supporting public goods comes with prohibitive costs of business transactions. Private provisions of such public goods as electricity, and deficient logistics infrastructure, unquestionably burgeon the overall costs of business operations. By substantially shrinking prospective profit margins in the face of a highly uncertain business environment, it becomes doubly risky to extend credit facilities to such businesses. Banks and other financial institutions pay close attention to this scenario in deciding which organizations seeking financing get it.
Elevated levels of uncertainty equally affect banks’ willingness to extend long-term credit to businesses. The more severe the uncertainty, the more challenging it is to make realistic business predictions across distant time horizons. The financing community is accordingly very reluctant to extend credit support when business performance expectations are low because of heightened uncertainties. This factor also influences the rate of interest charged on borrowed funds. The combination of costs of transacting and the elevated levels of risk and uncertainty in the environment of business affects the supply of loanable funds, which consequently affects the rate of interest. Africa’s business environment is replete with these high operating costs and uncertainties. And naturally, because of the difficulty in successfully envisioning the future, it is also precarious to give long-term credit. Understandably, therefore, banks and other financial institutions prefer to provide short-term credits as opposed to longer-term financing preferred by entrepreneurs. Often, the resulting mismatch in using tranches of forced short-term facilities to finance long-term projects aggravates the overall costs of doing business.
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Overall, these factors – among others – contribute to remarkably high loan default rates in the continent. In Nigeria, for instance, default rates are as high as 40%. The severity of these incidences equally allows banks and other financial institutions to tighten the nozzle on the credit supply. Three factors are partially responsible for this. The first is the already discussed high levels of macroeconomic uncertainty. The second is the apparent unwillingness or lack of capacity of the financial services sector to rescue firms in difficulty. The third is defective business transformation programs to which many organizations subscribe.
Unarguably the most significant cause of loan defaults is the highly uncertain environment of business. Of course, several other factors, such as defective strategic estimates, fed into the organization’s perspective plans and the nibbling and diversion of borrowed funds into hitherto unplanned operational areas. Again, the adverse effects of uncertainty always underlie financing shortfalls, pushing organizations to nibble on borrowed funds to cover the gaps desperately.
Similarly, unofficial estimates show that less than 5% of banks and financial institutions within the continent are interested in rescuing firms that are on the brink of collapse. Many hitherto highly performing business organizations have completely collapsed because their banks refused to give them minimal short-term bridging facility. Banks and financial institutions would prefer that they recover the credits granted to those institutions by selling off the pledged collaterals than granting additional credit with some transformation plan to resurrect it. Most times, the former option appears to be a better credit risk management window. It is also mainly a function of the insufficient capacity of the human resources in these financial institutions to manage company turnarounds or resuscitation effectively. Overall, they leave the continent with high rates of firm credit defaults and morbidity.
In addition to the lack of strong business turnaround capacity among financial institutions is inadequate robust programs for business rejuvenation and recovery. Several organizational recovery efforts are nothing more than temporary masking of their fundamental challenges. Pouring more money into the company may seem to be the way out. Unfortunately, many times, this approach proves to be temporarily effervescent in the absence of well thought out program that links the extra money to expected performance. The new funds provide illusory bubbles of recovery that are not sustainable. Often the target organization easily relapses back into its original crisis conditions. The Handholding framework has proven to be a completely robust system for restoring organizations that are in near morbidity situations back to the fullness of dependable performance. One of the five secret pillars for such consistent meteoric performance is business accreditation.
The business accreditation pillar of the handholding model tests a robustly designed resuscitation model before qualifying it for continued use. As in every turnaround program, consultants curate performance revamp models based on the peculiarities of the target clients. The model that most successfully worked with a company ‘A’ may not yield comparable results with a company ‘B’. Such model variations based on the peculiarities of the organization’s challenges require an adequate evaluation and testing with definitive proof of concept before full financing. For instance, if based on a strategic ideation process, a financing requirement for a performance revamp is approximately $200 million, business accreditation expectations demand rigorous reassessment and testing of the model suggesting the financing requirement. Based on the handholding model, operators set aside approximately 15% of the recommended financing requirement to pilot test and prove the concepts for about six months. The model receives accreditation at the end of this process if it fully satisfies all the associated expectations. A fine-tuning of the model takes place when there are significant performance gaps to ensure that the model is robust enough to deliver on set targets. This accreditation process is a critical omission in most of the turnaround models for deployment.
It is hazardous to finance businesses in Africa based strictly on developed business plans. The elevated levels of uncertainty qualify the enormity of these risks. Second, many consultants develop business plans not based on workable models but to help the client meet the credit requirements of financing institutions. When this is the aim, the resulting business plan ceases to be a reliable document for the performance revamp of the target business. Third, a lot of business plans are document pipes for draining money off the banks. The developers of the plan in concert with some target clients merely over-invoice some cost items to have surplus funds aside for the primary purpose. These concerns implicitly assume that the developers of the business plan have the requisite expertise to do an excellent job. Evidence shows that this is not the case most times. It is also quite risky for a financial institution to finance business ideas which they know little. The financing leg of every business transformation implementation program should satisfactorily understand the strategic thinking behind the business ideas which it seeks to finance. The emphasis here is ‘satisfactorily’. It means that the financing institution understands not only the concept to finance but also the thinking behind their building blocks. It also means that the financing institution must have asked all relevant questions clarifying the connection between the ideas put forth in the business plans and the future performance expectations.
That is why authentic proof of concept is the most reliable measure of the readiness for financing. What it means is that during the accreditation period, a bank or any financial institution, for that matter, makes available to the client a maximum of 15% of the agreed financing sum to test the effectiveness of the business plan model in delivering on the target performance it specified. This action indemnifies the bank against 100% exposure in the case of defective plan models. The financing institution uses performance tracking indicators in business plans as well as other measures of performance progress to gauge how effectively the documented plan model can satisfactorily deliver on its performance promises. It is only when all parties are satisfied with the pilot testing and can attest to a full proofing of the business plan model that it is accredited. Such accreditation consequently qualifies the target client to the outstanding 85% of the required fund. All parties in the process understand that the accreditation period is purely for determining whether the bank can go ahead with the funding or otherwise.
Business accreditation is, therefore, extremely critical for financing. It is beneficial to the demand and supply sides of the loan market. First, it facilitates pilot testing of strategic ideas to ensure that they are both implementable and deliver on expected outcomes. Financing risks exacerbate when the road to profit from articulated strategic initiatives is not clear. Although on paper, with the right set of assumptions and correctly guessed constraints built into the model, they may easily pass the tests of clarity. But these are usually on paper. There is also no certainty around assumptions made, regardless of how realistic they may sound. The only reliable way is to test it out. The pilot testing and accreditation process make it easy to determine ‘what works’ and what does not. It helps to see the weaknesses in the assumptions made in constructing the model. It also ensures that built-in constraints play out alongside the sensitivity levels of all parameters. The actual test of any strategic model is to see it in action. ‘See in action’ is the goal of the business accreditation phase of the handholding model. Accreditation will naturally reveal whether stakeholders should use the designed model as-is or fine-tune in line with the tested realities.
Therefore, one fundamental importance of the business accreditation phase is its facilitation of the fine-tuning process for strategic ideas. Models are typically imperfect. The imperfections are more apparent during the accreditation process. Improvement of the model, therefore, requires relevant adjustments to the identified deficiencies for creating a workable and dependable model that delivers. Overall, the accreditation process guarantees minimum financing risks. Banks receive protection from the unsavoury possibility of loan defaults. By identifying all potential landmines that can make the designed model not to deliver expected results and making all relevant adjustments to make the model suitable, banks and other credit supplying institutions are sure that granted credit facilities would not go bad. Even the business organizations that borrow from these banks will equally have more confidence in their capacity to repay borrowed funds. Business accreditation for financing, therefore, creates the right platform for win-win in business financing.