Scholarly article on topic 'SME Firm Performance-Financial Innovation and Challenges'

SME Firm Performance-Financial Innovation and Challenges Academic research paper on "Economics and business"

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Abstract of research paper on Economics and business, author of scientific article — Anthony Abiodun Eniola, Harry Entebang

Abstract Without incertitude, SMEs have become the significant clout of sustained, instantaneous and bracing growth of Nigeria economy. Moreover, SMEs has performed an unparalleled role in advancing the Nigeria economic growth, and serve as a breeding ground for entrepreneurs and a provider of solutions to address the problems of unemployment in all consuming labours and promoting marketing growth. An opportunity for the healthy advancement of small and medium-sized enterprises (SMEs) in Nigeria was in relation to the transformation and expansion policy due to the brisk evolution of the global economy. But with the global economic integration, the small and medium-sized enterprises operating environment is facing tremendous changes and more intense competition. Hence, the reason for this paper is to present the sources of SME firm financing, conceptualize its financing challenges, source causes, with objectives to exploit the innovative ways to improve financing provision via crowdsourcing of financing and necessity to provide a regulatory environment that will support it for the growth and advancement of SMEs prospectively. Likewise, it is an essential strategy that would assist entrepreneurs to remain much motivated towards promoting his line of work. Moreover, it will reassure an individual to become a successful entrepreneur. This study will add to the existing literature in the academic area of entrepreneurship and at the same time offers a springboard that will provide an impulsion for empirical inquiry in this field. Besides, it offers important information and methods that would help entrepreneurs on how crowdfunding can serve as a source of financing provision and the positive impact on Small and medium enterprises (SMEs) firm performance.

Academic research paper on topic "SME Firm Performance-Financial Innovation and Challenges"

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Procedía - Social and Behavioral Sciences 195 (2015) 334 - 342

World Conference on Technology, Innovation and Entrepreneurship

SME Firm Performance-Financial Innovation and Challenges

Anthony Abiodun Eniolaa*, Harry Entebanga

aDepartment of Business Management, University of Malaysia, Sarawak, Malaysia

Abstract

Without incertitude, SMEs have become the significant clout of sustained, instantaneous and bracing growth of Nigeria economy. Moreover, SMEs has performed an unparalleled role in advancing the Nigeria economic growth, and serve as a breeding ground for entrepreneurs and a provider of solutions to address the problems of unemployment in all consuming labours and promoting marketing growth. An opportunity for the healthy advancement of small and medium-sized enterprises (SMEs) in Nigeria was in relation to the transformation and expansion policy due to the brisk evolution of the global economy. But with the global economic integration, the small and medium-sized enterprises operating environment is facing tremendous changes and more intense competition. Hence, the reason for this paper is to present the sources of SME firm financing, conceptualize its financing challenges, source causes, with objectives to exploit the innovative ways to improve financing provision via crowdsourcing of financing and necessity to provide a regulatory environment that will support it for the growth and advancement of SMEs prospectively. Likewise, it is an essential strategy that would assist entrepreneurs to remain much motivated towards promoting his line of work. Moreover, it will reassure an individual to become a successful entrepreneur. This study will add to the existing literature in the academic area of entrepreneurship and at the same time offers a springboard that will provide an impulsion for empirical inquiry in this field. Besides, it offers important information and methods that would help entrepreneurs on how crowdfunding can serve as a source of financing provision and the positive impact on Small and medium enterprises (SMEs) firm performance.

© 2015TheAuthors.PublishedbyElsevierLtd.This is an open access article under the CC BY-NC-ND license

(http://creativecommons.Org/licenses/by-nc-nd/4.0/).

Peer-review under responsibility of Istanbul Univeristy.

Keywords: Financing Sources; SME; Performance; Firm; Crowdfunding; Nigeria

* Corresponding author. Tel.: +60109690855 E-mail address: tony42003@yahoo.co.uk

1877-0428 © 2015 The Authors. Published by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license

(http://creativecommons.Org/licenses/by-nc-nd/4.0/).

Peer-review under responsibility of Istanbul Univeristy.

doi:10.1016/j.sbspro.2015.06.361

1. Introduction

SME sector performance is sine qua non to the performance of the nation. The vast majority of firms worldwide are SMEs, and they serve as a breeding ground for entrepreneurs and a provider of solutions to address the problems of unemployment in all consuming labours and promoting marketing growth. The importance of SMEs in the evolution of economic, reduction in poverty, increase in employment, output, innovation in technology and lifting up in social position and standard is globally proven and acknowledged in emerging as well as in developed economies. According to Eniola and Ektebang (2014) Small and Medium Scale Enterprises have been acknowledged to have a prodigious potential for sustainable Development. The surplus of the workforce employees from bigger firms was able to be reinstated back to the employment, mainly through the growth of SMEs.

Firms depend on a variety of sources of financing, both internal and external for performance (Terungwa, 2012). Firm performance is constrained by internal factors, such as resources and strategic choices and external factors, such as the carrying capacity of the environment or competition. The resource-based view of the firm suggests that competitive advantage stems from the possession and deployment of resources that are in some way superior to those of its competitors. Access to financial provision has been highlighted as one of the major constraints affecting the performance and development of SME/SMIs in Africa. According to Fadahunsi (1997) the high mortality rate of SMEs is about 85 out of every 100 in Africa as a result of lack of access to sources of financing and entrepreneurial skills.

Financing, according to Mukhtar (2009) is a precondition to the performance of enterprises. There are many different ways firms financing their operations and growth. Their financing choices are influenced by the predilections of each firms entrepreneurs and, more essential, by the alternative that are approachable to them. So far, there are more than 17,000,000 small and medium-sized enterprises in the country, playing a significant role in the economy of Nigeria. Yet, they are confronted with many challenges to achieving advance growth. According to Beck and Demirguc-Kunt (2006) SME firm still experiences various difficulties to boost developmental growth, particularly in financing. This study descriptively and conceptually considers its financing difficulties from the area of financing provision sources and examines the conventional and the innovative financing options, which is of great significance for the SMEs firm performance and improve Nigeria economy. Mastering applicability and feasibility of financing channels are important for this study.

The first section of this article is an introductory discussion of the subject of the article. The second section starts with the literature review of SMEs definition. The third section handles the issue of SME and sources of financing. In the fourth section, the financing situation of SMEs in Nigeria is appraised. In the fifth section, the causes of SME financing challenges from its sources is analyzed. In the sixth and final section has the insight for financial innovation in Nigeria and the conclusions presented.

2. Literature Review SME Definition

A review of the literature on Small and Medium Enterprises (SMEs) shows that the definition of SMEs significantly varies from country to country depending on factors such as the country's; number of employee, the value of fixed assets, production capacity, basic characteristics of the inputs, level of technology used, capital employed, management characteristics, economic development, and the particular problems experienced by SMEs (Enquobahrie, 1997; Harabi, 2005). On this certitude, it is very arduous of comparing SMEs among different nations, especially when the index is not the number of employees, but the economics of the business annual turnover and total assets. Researchers and other concerned parties have used distinct criteria to operationalize the small business, from the position of the number of employees, which is the size analogy and description as their distinctive criteria for defining SMEs. Central Bank of Nigeria defines SMEs according to asset base, turnover, and number of staff employed.

3. SME and Sources of Financing

According to Shepherd (1997) credit determines access to all of the resources on which SMEs owners/manager depend on. Credit serves as a source of funds to SMEs that can be utilized in the production and sustaining a firm competitive advantage process (Eisenhardt & Martin, 2000). According to different standards, financing can be divided into many kinds; this paper divides financing according to its sources.

Internal financing means enterprises get capital on their own, mainly including retained profits and depreciation, which is an essential part of the survival and development of the enterprises. Generally speaking, internal financing is the first choice, an important source to get capital. Previous researchers, scholars and practitioners, Gelinas (1998); Pretorius and Shaw (2004) identified two fundamental financing concepts of SMEs, the internal and external forms of financing. Business financing can come either from internal or external sources. Still, more profitable SMEs makes use of external sources of financing, like financial banks, individual investors, venture capital, crowdfunding and then make out fewer successful firms. According to Fischer and Reuber (2003) external resources providers is a key ingredient for rapid growth. Both, most SMEs use more internal sources of financing and this affect their performance. The key determinant of business start-up, development and performance for small and medium sized enterprises (SMEs) is access to financing either external or internal.

Formal sources of financing SMEs are the commercial banks, merchant banks, and development banks who are the provider of formal sources of finance to SMEs. This set as a financial organization with the purpose of profit acquisition, run by the states or independent capitalist. In an effort to make this core objective of banks, they perform a number of roles. One of the actions is the upset of the adoption of deposit as a credit to entrepreneurs and businessmen for productive uses. It is mentioned that the bank credit is important for the take-off and efficient operation of any commercial enterprise. Such an enterprise may be in any form or size. It is equally required to coordinate other factors of production besides the initial demand for capital for investment purposes. Bank credit influences SME firm performance positively which transmit to the tier of economic activity in the state. Likewise is capable of deciding what is to be produced, for whom and how to be produced and even at what price the good or services is failing to be available to consumers.

Debt financing can be obtained from two sources, formal and informal sources. Formal sources are usually viewed as institutional sources, whereas informal sources refer to family, friends, directors, trade credit, and so on. Debt financing occurs when investors provide capital in the shape of loans for the managers/owners of a company to use to run the line. The firm, in return, pay interest rate for the use of the credit of the capital borrowed from the investors. Smaller firms, which require external finance, prefer to use debt funding from lending institutions as provenance, especially banks, are the most popular source of debt finance (Keasey & Watson, 1994; Samuels, Wilkes, & Brayshaw, 1997). Information asymmetries and moral hazard have a pronounced impact on banks and other finance providers particularly at the start-up level. This is because of the lack of collateral and market presence; characterize most high-tech start-ups. Banks want the firm to have collateral, an asset that is utilized to guarantee the loan, but this requirement often is negotiable. If a firm is having difficulties meeting its obligations, it is normally more comfortable to negotiate new terms for bank financing than for issuing securities. This flexibility results from the ongoing relationship between the bank and the firm.

Equity financing is one provenance of financing provision a firm may employ to finance its business operations (Higgins, 2012). Equity financing is received in return for a proportional portion of a firm's value. It's the net worth of a firm; the value of the assets less the value of the financial obligations. The value of the equity of a concern is whatever remains after the company fulfils all of the claims of its creditors (residual claim). Equity capital can be furnished by the proprietor or by the directors of the firm, known as internal equity. Internal equity can also be supplied via profits made and retained by the business. As a matter of choice, third parties equity can be supplied, external equity. External equity is the means of raising capital through the sale of shares in a company. Equity financing essentially refers to the sale of an ownership interest to advance finances for business functions. Equity financing spans a broad range of activities in scale and scope, from a few finance raised by an entrepreneur from friends and family, to giant initial public offerings (IPOs) running to raise huge capital. While the condition is mostly associated with financings by public companies listed on the stock exchange, it includes financings by

private companies likewise. Equity funding is apparent from debt funding that refers to the funds borrowed by a business.

Short-term financing is determined as a loan or credit facility with a maturity of a year or less. It is as well defined as a credit arrangement extended to a mortgage banker to finance an inventory of loans that are resold to investors. Because of the difficulty in raising adequate finance for expansion, Bates and Hally (1982) revealed that small firms are often driven to access short-term and medium-term sources of financing at high costs in condition of overdraft, trade credit, credit cards, leases and bank loans. Whilst small firms are found to be moving from depending on short-term towards long-term finance; they are still greatly relied upon short-term bank loans and overdrafts to finance their business activities and operation (Keasey & Watson, 1994; Stanworth & Gray, 1991).

Long term financing is a form of financing that is provided for a period of more than a year (Higgins, 2012). It is a financial obligation lasting over one year. It would include any financing or leasing obligations that are due to come in a greater than 12-month period. Long term financing services are provided to those business entities that face a shortage of capital. Long-term financing is generally for assets and projects and short term financing is typically for continuing operation. It is distinct from short term finance that is generally accustomed to offer cash that has to be paid back inside twelve months. Likewise, the length of time may be shorter than twelve months. Long-term financing includes a 30-year mortgage or a 10-year treasury note, like, when an organization issues stock to put up capital for a new investment. Equity is one means of long-term financing. Broadbent and Cullen (2003) observed that sources of long-term financing include shares, debentures, public deposits, and retained earnings, term loans from banks and loans from financial institutions. Shares are authorized by the general public. The shareholders are the business owners. These may be of two types Equity and Preference. Debentures are also issued to the general public. The holders of debentures are the creditors of the company. Public deposits come about since the general public also like to deposit their savings with a popular and well-established company which can pay interest periodically and pay back the deposit when due.

4. Financing Situation of SMEs in Nigeria

Financing of SME's in Nigeria has been a prickly topic. Capital is significant to the success of a business management as it forms the foundation of the business. Nwachukwu (2012) submitted that the performance of SMEs in Nigeria have not produced the expected, desired impact on the development growth and this may not be unconnected to the numerous challenges facing the SME's among which is financed. Claessens (2006) affirmed that one of the issues linked to accessing financing acknowledge to the questioning, whether financial services are available and in what quantity. The phenomenon of SME financing difficulty exists in many countries in the world, even in the developed countries with relatively sound financial system, but this phenomenon in Nigeria is particularly prominent. According to Ekpenyong and Nyong (1992) there is wide consensus in Nigeria that government policies are skewed in favour of the formal sector to the detriment of the informal sector. This asymmetry is to the good disadvantage of SMEs in Nigeria since they're additionally disposed of the funds of the informal sector. Also, Steel, Aryeetey, Hettige, and Nissanke (1997) the liberalization had little effect to undermine informal financial sector in Nigeria and other developing African countries.

Table 1: Aggregate loans and advances to SMEs by commercial banks (1992-2013)

Year Commercial Banks Loans To Small Scale Enterprises (N' Million) Commercial Banks Total Credit (N Million) Commercial Banks Loans To Small Scale Enterprises as Percentage of Total Credit (%)

1992 20,400.00 41,810.00 48.80

1993 15,462.90 48,056.00 32.18

1994 20,552.50 92,624.00 22.19

1995 32,374.50 141,146.00 22.94

1996 42,302.10 169,242.00 25.00

1997 40,844.30 240,782.00 16.96

1998 42,260.70 272,895.50 15.49

1999 46,824.00 353,081.10 13.26

2000 44,542.30 508,302.20 8.76

2001 52,428.40 796,164.80 6.59

2002 82,368.80 954,628.80 8.63

2003 90,176.50 1,210,033.10 7.45

2004 54,981.20 1,519,242.70 3.62

2005 50,672.60 1,899,346.40 2.67

2006 25,713.7 2,524,297.9 1..02

2007 41,100.4 4,813,488.8 0.85

2008 13,512.2 7,806,751.4 0.17

2009 16,366.5 9,667,876.7 0.17

2010 12,550.3 9,198,173.1 0.14

2011 15,611.7 9,614,445.8 0.16

2012 13,863.5 10,440,956.3 0.13

2013 15,353.0 11,591,979.4 0.1

Source: CBN (2014)

According to the CBN survey bulletin, on SME financing 2014, it will be observed that commercial bank loans and advances to SMEs have been decreasing over the years. According to the study, commercial bank loans to SMEs as a percentage of total credit decreased from 48.8 per cent in 1992 to 22.19 per cent in 1994. The trend increased marginally to 22.94 per cent and 25.0 per cent in 1995 and 1996, respectively. There was a sharp reduction from 25 per cent to 16.96 per cent in 1997. The total credit to the commercial banks increased from N2.5 trillion level in 2006, N4.8 trillion in 2007 and N7.8 trillion in 2008. Despite these increases, the loans granted to SME's declined drastically from N25.7 billion, representing 0.99 per cent in the year 2006, N41.1 billion, representing 0.85 per cent in 2007 and N13.5 billion representing 0.17 per cent in 2008. In 2009 up to 2012 commercial bank credit to the economy continued an upward increase while total credit to SMEs continued a downward reduction, and the decrease continued till it reached 0.13 percent in 2012. Similarly, merchant bank loans to SMEs as a percentage of total credit reduced from 31.2 per cent in 1992 to 9 per cent in 2000. The above statistics demonstrate that the Nigeria financial framework is greatly capitalized and dynamic; but, her increase, and improvement of entrepreneurship and MSMEs sector is weak.

Ogbuabor, Malaolu, and Elias (2013) examined the historical trend in the development of SMEs in Nigeria and observed that under the Nigerian Content Act 2010, various opportunities that can contribute to competitive advantages are now only reserved for Nigerian companies. The survey underscored the demand for access to funding for development of the capital base of SMEs, and indicated that the Act would offer a turning point in the recognition of all the policy trusts formulated for growing SMEs in Nigeria in the hereafter. Despite their performance dominant numbers and importance in job creation, SMEs has always faced difficulty in obtaining formal credit or equity from financial markets. This asserts the fact that the major gap in Nigeria's industrial development process is the lack of long-run and in some cases short-term finance for SMEs.

Table 2: Sources of Financing: International Comparison

Percentage of short term financing Nigeria Brazil China India Indonesia Kenya S. Africa

from :(%) 2008 2003 2003 2005 2003 2007 2003

% % % % % % %

Internal Funds/ Retained Earnings 70 44 13 47 38 73 66

Borrowed from banks and other 1 30 27 32 16 7 17

financial Institutions

Purchases on credit from suppliers and 25 15 2 9 4 17 12

advances from customers

Borrowed from family, friends and 4 5 8 9 20 3 1

other informal sources

Issued new equity/debt - 4 12 2 2 - 1

Source: Isern et al. (2009).

From the table above it is obvious that SMEs in Nigeria, firms always rely on retained earnings. While according to Idowu (2010) SMEs rely on overdraft to finance long- term investments, and these have to be fully collateralized. According to ECA (2001) even access to this overdraft and short-term loans are extremely restricted. In the study carried out in Nigeria by the USAID (2005) roughly 70 per cent of respondents utilizing commercial banks overdraft

facilities with lower interest rates were needed to pledge collateral in the cast of Land (48 per cent), Building (31 per cent), fixed asset, such as machinery (35 per cent) and other assets (8 per cent). It is to be taken down that table above does not include long-term financing. For long-term financing of entrepreneur, supplier credit is not an option, so firms tend to rely on own funds over 90 per cent of the time.

Empirical studies such as Wiklund and Shepherd (2005); Zou and Chen (2008) identified that SMEs need financial capital to obtain physical resources in order to take advantage of business opportunities. Sanusi (2003) study showed that SMEs accessibility to formal financing in Nigeria is very limited. To build and sustain an SME, the entrepreneur requires to accessing varying forms of resources, like human capital; physical capital; and financial capital, each playing same significant, but different purposes during the life cycle of a new SME (Fatoki, 2014).

In this respect, some authors have studied SMEs difficulties in accessing finance (demand side characteristics) while others have presented the main issues in bank lending practices (supply side characteristics). Understanding why SMEs face a financing gap, commonly defined as the difference between the volume of funds at their disposal and the volume of funds they require, implies distinguishing the various limitations which describe both sides. The supply side impediment is noticeable, when the terms and conditions are not suitable for SMEs; the apt sources of finance are not accessible. The demand side constraints exist if entrepreneurs do not make use of existing financing opportunities, because of a shortage of good projects, lack of financing literacy, lack of persuasive business plans or lack of collateral presentation (OECD, 2004).

5. The Causes of SME Financing Challenges from Its Sources

The phenomenon of SME financing snag is brought along for numerous reasons, for instance, corporate itself issues, banks points of restriction, and credit establishments. This paper centres its financing sources specifically financing strategy to break down financing challenges of SME. Because of the Nigeria financial institutions framework, to prepare for monetary hazards, commercial banks changed their lending improvement procedure to favour large businesses. These developments created SMEs found with a smaller size in number or organization to experience issues in getting access to credit facilities. Furthermore, it's still a huge challenge for SME to get bank advances regarding bank credits structural, viability, and maintainable quality. On the supply side collateral guarantee is the main standards for loan approval, additionally, bank credit keeps on inclines toward substantial venture or SME firm that run well, also, long - time credits are amazingly low. This lopsided structure has obstructed the maintainability of SMEs with most likely, subsequently; prompt inept loaning, paucity of credit overseeing and assessment framework in SMEs. Small and Medium-sized financial establishments are not many, as far as the current state of affairs of financial establishments in relation to SMEs, and face numerous issues and challenges in its further advancement, hence are unable to content the SMEs. The not strong credit financing, and non-subjective or mortgage asset resources, considered by banks makes it more significantly challenging in raising financing provision. Likewise, the no third-party undertakings with enough credit rating assessment to offer guarantees, making it reliable for funds obtainable from banks. The distance between the entrepreneur and the bank also determines the transaction costs. Geographic proximity between a bank and borrower facilitates frequent face-to-face communication and, subsequently, increases a strong bank relationship. SMEs located in rural areas of Nigeria, lag behind their urban areas, due to the high risk associated SMEs, there is a persistent lack of bank loans for rural entrepreneurs. Hence, financing institutions still have incredible breaking points for SMEs in fund raising. To circumvent these problems, the missing middle brings innovation in financing provision sources for SMEs in terms of crowdsourcing for funds.

6. Financial Innovation

In overcoming the financing challenges and fix up the missing middle, alternative finance plays an increasingly important role in helping businesses in financing provision they need to grow and contribute to the economy, which is the innovative idea of crowdsourcing of financing or crowdfunding. Crowdfunding is the method of funding a business project by raising financial contributions from a dependable range of people through the cyberspace. Crowdfunding is an interdisciplinary nature, being at the intersection of management, information systems, sociology, economic, and finance. It is the method by which small business owners being refused by

commercial banks and financial institutions at present receive an opportunity to appeal immediately to small investors. Through multiple small-scale investors, crowdfunding provides financing for commercial ventures (Pierrakis & Collins, 2013). Crowdfunding as a financing source can circumvent many of the restrictions of traditional financing models because it made possible to seek and raise funds for a new venture or specific projects.

The gap in financing, coupled with the ascent of social media and interactive online platforms, has led to the increased popularity of crowdfunding as a potential alternative source of financing. Crowdfunding is an effective alternative method of raising finance for people with creative projects to fund their goals. It involves soliciting and collecting relatively small amounts of money from a large number of people. Belleflamme, Lambert, and Schwienbacher (2014) the objective of crowd funding is to collect money for investments through the use of social networks on the Internet.

The primary characteristic of crowdfunding is that each donation is normally symbolized by a low quantity of money. Consequently, the more people making contributions, more the chances are that the relevant project will attract enough funds for its execution. Therefore, enlarging finance for SME firm and entrepreneurs by offering financial backing when traditional forms of finance are missing; eliminates geographical barriers to raising finance; serves as path to identify good investment projects, which is a unique way to validate original ideas in front of a specifically targeted audience; and attracts investment by appealing to both financial and non-financial motives of the investors (Pierrakis & Collins, 2013).

The crowdfunding phenomenon is continuously developing. In Nigeria and Africa, though, it has not been fully embraced compared to the US where $1.5 billion was raised in 2011 via crowd funding (Ijatomi, 2012). According to Kuti and Madarasz (2014) USD 2.7 billion was raised through crowdfunding in 2012, worldwide, and the industry insider forecasts an increase in the market to USD 5.1 billion beyond. According to the report of the Internet world stats, June 2014, Nigeria has the largest internet users in Africa and 8th in the world. With more than 70.3 million internet users in Nigeria, this is a really large number of people a budding entrepreneur can reach through crowdfunding, many already making financial transactions online via gogoafrika.com, Push and start, Funda Solva, 234give.com, Jumpstart Africa, and startcrunch.com, which is a limited number and is not too dependable for the economy that is alleged to be thriving fast.

However, there aren't any far-famed laws that guide crowdfunding in Nigeria in contrast to U.S, Canada, Turkey, United Kingdom, and some countries in Europe where the practice is heavily guided by legislation. For instance, in 2012, Italian Government passed a law in allowing innovative start-up companies to raise equity capital through dedicated crowdfunding platforms (Quintavalla & Piattelli, 2014). Consequently, this law has guided and making, the crowdfunding platforms number doubled in Italy over the last few months, counting 24 platforms and more than 1700 projects published since October, 2012 to June, 2013.

Pierrakis and Collins (2013) asserts that technological advances have assisted the growth of crowd funding. The authors further argued the fact that the technology advances is the capability to effortlessly build a free online connection structure, secure online money transferring services, accurate credit scores that can be utilized by many different financiers, and free social media marketing tools that can be utilized to engage geographically dispersed large crowds of people. Crowdfunding can improve Nigeria SMEs' access to finance and potentially remedy certain market failures, such as the insufficient provision of funding for start-ups and early-stage companies. Its special design provides flexibility, cost-effectiveness and a high speed of raising finances. Entrepreneurs as well gain a market-testing tool which permits them to calculate demand and collect feedback from possible clients. Benefits for contributors include civic or community engagement and, in the case of theoretical accounts with financial returns, an investment opportunity.

According to Widuto (2014) crowdfunding can be a financing option for SMEs but it entails certain risk such as risk of fraud, platform closure or _ failure, project default, cyber-attack, donor exhaustion, misleading advertising practices, legal uncertainty stemming from different legislation, liquidity risk (lack of exit options), and infringement of intellectual property rights. Through appropriate law and regulation, more or less of the stated has already been accosted by a number of countries. It would be important for the government to recognize the potential platform of

this nature possesses, pass legislation on it so that it does not get taken over by elements of shady nature and those benefiting from it do so while maintaining best practices.

7. Conclusion

SME have become the important force of sustained, rapid and healthy development of Nigeria economy. There are many kinds of financing sources that can be adopted for financing small and medium-sized enterprises. It is important for an SME firm to be innovative in choosing correct and appropriate financing sources to solve the company's financial challenges This paper mainly analyzes the financial innovation and the causes of financial challenges, from its sources, find that fewer bank loans issue, geographical issues, and that lack of standardization in public funds have hindered the successful financing of SMEs. Likewise, the study looked at various means of financing SMEs and observed that there is still low of external financing provision for an SME firm in Nigeria.

The study suggested that one of the innovative ways for SME firms becoming increasingly important and irreplaceable in promoting economic development in Nigeria is to improve financing provision via crowdfunding. However, there is the need for government to provide the regulatory environment that will support crowdfunding in Nigeria. This review is one of the a few studies that approached this subject. It is an essential strategy that would assist entrepreneurs to remain much motivated towards promoting his line of work. Also, it will reassure an individual to become a successful entrepreneur. This work will add to the existing literature in the academic area of entrepreneurship and at the same time offers a springboard that will provide an impulsion for empirical inquiry in this field. Besides, it offers important information and methods that would help entrepreneurs on how crowdfunding can serve as a source of financial provision and the positive impact on Small and medium enterprises (SMEs) firm performance.

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