By Benon Ojiambo

Small and Medium Enterprises (SMEs) are spread across all sectors, accounting for 49% of the service sector, 33% in commerce and trade, 10% in manufacturing and 8% in other fields.

Over 2.5 million people are employed in this sector and account for approximately 90% of the entire private sector, generating over 80% of manufactured output that contributes 20% of the gross domestic product (GDP), according to Uganda Investment Authority (UIA).

But lack of SME financing holds back high potential enterprises, yet investing in their growth benefits the whole value chain such as suppliers, processors, distributors and storage facilities. Experts have argued that there is no better way to grow the economy than offering affordable finance options to the SMEs.

Charles Ocici, the Enterprise Uganda executive director, says SMEs play a key role of perfecting the quality of what the large enterprises want and helping the grassroot people get their products to large markets.

Ocici also says about 70% of the SMEs in the East African region collapse within 24 months for reasons related to financing and lack of basics in enterprise management. Daniel Kaggwa, the country manager Business Partners International, a risk finance company for formal SMEs, also attributes SMEs failures to limited access to finance.

Supporting SMEs through provision of affordable credit has become a cause célèbre and with good reason, for they are contributors to employment. But while nearly everyone can rally behind the rhetoric of supporting SMEs, bankers are yet to fully embrace them.

A 2012 African Development Bank report on financing SMEs in Kenya, Tanzania, Uganda and Zambia showed that the SME segment is a strategic priority for banks in the region, as they are considered a profitable business prospect that provide an important opportunity for cross-selling.

However, the report revealed several factors constraining banks' engagement with the segment including macroeconomic factors, business regulation, legal and contractual environment and lack of a more proactive government attitude towards the segment. Another report revealed that an estimated 80% of SME investments in Africa are financed through internal funds, as commercial banks shy away due to their perceived risky nature and lack of collateral, which at times does not suit the type and value of the loans sought.

Edward Isingoma, the managing partner of Pearl Capital Partners, a private equity firm that operates in Uganda, Kenya and Mauritius, at the recent 2nd Private Equity and Venture Capital conference, urged Ugandan businesses to consider alternative sources of funds, notable among them being private equity financing.

Under this arrangement, a private equity firm buys shares from a business without listing on the stock market. They become partners, share profits and losses, as well as bringing their expertise into the business, hence providing a long term source of cheap and sustainable capital for the business.

However, though SMEs are spread across different sectors of the economy, Isingoma says they only deal with SMEs in the agricultural sector because it is where specialisation is. Meanwhile Oiko credit an international company based in the Netherlands provides funding to the microfinance sector, fair trade organizations, cooperatives and small to medium size enterprises.

According to Edith Tusuubira Oiko Country Manager, Uganda the company which started operating in Uganda in 2005 has a portfolio of over sh100 billion. "In our portfolio, we lend to coffee trading organisations, agricultural players, financing micro finance institutions," she says.

Oiko also does crop finance principally in the area of agriculture for area cooperative enterprises in partnership with Uganda Cooperative Alliance. This scheme was started in 2012 and so far the company has assisted more than 10 organisations to improve their enterprises, Tusuubira says.

Why register your business?

By Benon Ojiambo

Many a business person prefer to operate their small ventures below the visibility of government due to fear of business registration and formalisation. But be it a small farm, trade in food, animal rearing, service provision like legal or advisory services, business formalisation is crucial.

Many business people prefer to operate the shopkeeper way due to the fear of Uganda Revenue Authority and perhaps a mere lack of appreciation of the importance of registration.

Though staying informal means avoiding taxes and registration costs, something they see as an advantage in cutting costs, it also means missing opportunities like bidding for government contracts that could offer financial security and a path for growth.

Patrick Bitature, the chairman of the Private Sector Foundation Uganda, once said from the day he chose to cease informal approaches towards business, he grew in leaps and bounds. According to a 2015 national small business survey conducted by the Financial Sector Deepening Uganda (FSDU), about 20% of the micro, small and medium enterprises (MSMEs) are not registered, while three quarters do not have tax identification numbers.

While there are attendant costs and difficulties in formalising small businesses, there are significant gains and benefits of formalising your business set-up starting with registration.

Developing a sound banking relationship

Uganda has one of the highest failure rates and limited access to finance among other factors that have been blamed for the high SME failure rate, as SMEs find it difficult to get credit from financial institutions.

Banks generally require a business to be formally registered with the registrar of companies before it can operate a business banking account. The more formal a business becomes in terms of registration and record keeping, the more attractive it is to a banker.

A source from Uganda Registration Services Bureau (URSB) says formalising a business gives it higher chances of accessing financial services that are vital for its growth. You may have a viable business idea that is profitable, but if your business is not very organised, you will find it difficult to convince a bank for support, the source says.

Assured growth and continuity

Informal businesses tend to come to an end with the demise of their owners because they (businesses) are solely dependent on the their personal involvement in the daily operations. A company that is a separate legal entity can outlive its founders, one of the advantages of registering your business. Having a duly registered company helps to more easily manage opportunities for growth and expansion that may arise in future, such as attracting new investors.

Participation in the bidding process

The URSB source says there is no single company that can participate in the bidding process without being registered as registration means opening doors to wide regional markets like the East African Community (EAC).

Challenges

While business registration is crucial, Charles Ocici, the Enterprise Uganda executive director, thinks otherwise. He was recently reported advising young entrepreneurs against rushing to formalise their businesses saying the "tax man would eat up all the meager profits", thereby affecting their growth.

The URSB source says, however, that the tax man can be a good ally if one exercises due diligence. The source says it should not be an issue to worry about, as taxes are only charged on profits.

The source says through massive sensitisation, the population has gained confidence in the bureau. This has also been aided by opening up offices in Arua, Mbale, Gulu, and Mbarara with plans underway to open up in Hoima and other towns.