Why African Businesses Struggle with Working Capital

Most African businesses don’t fail because the founders lack ideas, work ethic or aren’t innovative. As a matter of fact, an African founder work ethic is unmatched due to the uncertainties in the business ecosystem in Africa.

Source

I have seen a company roll out over 1000 motorcycles to start bike-hailing business in Lagos Nigeria. Three years later, the Lagos state government banned commercial motorcycles and that was it. They pivoted into logistics and food delivery. That is the weird business landscape we have in Nigeria and how founders adapt every now and then.

Businesses fail because cash arrives late. Remember Cash is King.

Customers delay payments. Suppliers want cash upfront. Banks demand collateral. Interest rates punish uncertainty. The business is squeezed from both ends.

Working capital is the silent killer of most businesses in Africa.

Let me use my recycling business as example.

The local aggregators that supply me request money upfront so they can source for waste in bulk. I have to give them since I need constant supply of pet bottles to process, I also have workers that collect daily wage such as loaders and drivers. Now, these processed PET bottles are sold to the offtakers who delay payment thus squeezing the business working capital.

Approaching a bank is suicidal because the interest rate at 35% is just unrealistic.

Then they request for all sorts of things like collateral worth 120% of the loan amount.

Banks prefer salary earners and fixed assets. SMEs operate on inventory cycles, receivables, and trust. That mismatch creates constant issues that never shows up in motivational speeches or glamourous IG posts.

This is why many African businesses remain small not because ambition is lacking, but because financing doesn’t match reality.

I have a plan to expand my recycling company explained here but hit a snag because the bank financing doesn’t match what is on ground. While I qualify for the loan, I can’t take it because it will kill the business. It is hard getting local investors because they only do it for the gram and political favours.

Until financial institutions adapt to how SMEs actually operate, growth will remain constrained.

I was browsing the other day and saw that interest rates in the US ranges between 8% to 25% depending on the individual credit score. It is still decent if one can get a loan at 10 – 12% interest rate. It allows you to plan well, I can literally plan for a 5years repayment and get lesser rate than 2years in Nigeria.

This is also why alternative finance and blockchain rails matter here more than anywhere else.

The average African founder want to improve and scale up but is limited due to working capital and constraints getting funding

Let me know your thoughts in the comment section

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