How Proper Accounting Can Improve SMEs’ Access to Funding

In today’s increasingly competitive economic landscape, Small and Medium-sized Enterprises (SMEs) play a vital role in fostering innovation, creating employment, and contributing to national GDPs. However, one of the most persistent challenges SMEs face globally—whether in developed or developing countries—is limited access to financing. Among the root causes of this issue is poor financial record-keeping and the absence of standardized accounting practices.

This article explores how proper accounting can bridge the financing gap for SMEs, drawing insights from global examples, identifying key financial metrics lenders examine, highlighting supportive institutions, and offering practical recommendations.

Why Proper Accounting Matters for SMEs

Proper accounting goes beyond tax compliance—it is the foundation of financial transparency, credibility, and informed decision-making. For lenders and investors, accounting records are the lens through which they assess the viability and creditworthiness of an SME. Without structured financial data, even promising businesses may be deemed too risky to fund.

Inadequate or inconsistent financial statements often deter potential funders due to uncertainty about cash flows, profitability, and operational stability. Conversely, well-maintained financial records improve the chances of securing loans, grants, or equity investment by providing assurance of responsible financial management.

Global Examples of Accounting Impact

Developed Country – United Kingdom:

In the UK, SMEs that engage with business support programs like those offered by Innovate UK or the British Business Bank are often encouraged to adopt digital accounting solutions like Xero or QuickBooks. These platforms improve accuracy and ensure financial statements meet compliance standards. A 2021 report by the Federation of Small Businesses (FSB) found that SMEs with structured accounting systems had a 40% higher likelihood of securing financing.

Developing Country – Nigeria:

In Nigeria, many SMEs operate informally and lack basic financial documentation. However, enterprises participating in initiatives like the Development Bank of Nigeria (DBN) or Bank of Industry (BoI) SME Loan programs receive capacity-building support that includes training in financial management. These programs have shown improved loan approval rates when applicants present audited or accountant-reviewed statements, a growing trend since the introduction of the Central Bank of Nigeria’s Credit Risk Management System (CRMS).

Key Financial Metrics Lenders Consider

When evaluating SMEs for funding, banks and other financial institutions look for consistency, transparency, and performance in the following key financial indicators:

1. Cash Flow Statements – Demonstrates the business’s ability to generate enough cash to service debt.
2. Profit and Loss Account – Reflects profitability over time, showing if the business model is financially viable.
3. Balance Sheet – Highlights assets, liabilities, and equity, indicating financial health and solvency.
4. Debt-to-Equity Ratio – Measures leverage and risk level.
5. Current Ratio – Assesses liquidity, i.e., the ability to cover short-term obligations.
6. Gross and Net Profit Margins – Provide insight into cost control and pricing strategy effectiveness.
7. Accounts Receivable Turnover – Shows how quickly the company collects money owed, which affects working capital.
8. Tax Compliance and Audit Trail – Lenders often require tax clearance and a history of audit or review by a certified accountant.

Support Institutions and Programs for SMEs

• World Bank SME Finance Initiative – Supports developing countries in building sustainable SME lending systems.
• African Development Bank’s Affirmative Finance Action for Women in Africa (AFAWA) – Offers credit and training to women-led SMEs.
• Small Business Administration (SBA) – USA – Provides loans, grants, and training to U.S.-based SMEs.
• European Investment Bank (EIB) – Offers funding to European SMEs, often in partnership with local banks.
• SME Corporation Malaysia (SME Corp) – Provides financial assistance, capacity building, and policy advocacy.

Practical Ways Forward for SMEs

1. Adopt Simple Accounting Tools: Cloud-based platforms like QuickBooks, Wave, or Sage can help SMEs in both developed and developing markets manage finances accurately and affordably.
2. Engage a Certified/Professional Accountant or Bookkeeper: A part-time accountant can help prepare financial reports, manage taxes, and offer advisory services tailored to loan applications. This can also be outsource to an accounting firm.
3. Undertake Financial Literacy Training: Partnering with chambers of commerce or NGOs offering financial training can help SME owners understand and interpret their own data better.
4. Separate Personal and Business Finances: This builds financial discipline and simplifies accounting processes, a common pitfall for small enterprises.
5. Develop a Funding-Ready Business Plan: Lenders also assess future projections; linking these with past financial data strengthens loan proposals.
6. Request a Financial Health Assessment: Many local business support agencies or banks offer free assessments that can help SMEs prepare for financing opportunities.

Conclusion

In both advanced and emerging economies, proper accounting is a decisive factor in whether SMEs gain access to funding. By adopting sound financial practices, leveraging available support institutions, and presenting clean, accurate financial statements, SMEs dramatically increase their chances of securing the resources needed for growth. For consultancy firms, empowering clients through financial literacy and accounting support is no longer optional—it’s a strategic imperative.

As a consultancy firm, we strongly encourage SME clients to embed accounting best practices early in their business journey. This investment pays dividends in the form of growth, stability, and funding access.

Need Help/Support  with Your Accounting or Funding Strategy?

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