At a time when access to finance remains one of the most persistent constraints facing small and growing businesses in Nigeria, the question of what makes a business creditworthy deserves a closer look. For many businesses, particularly those without substantial fixed assets, the answer may not be found entirely in the value of what they own, but in the strength and consistency of the cash they generate.
This was one of the key issues raised by Bukola Smith, Managing Director/CEO of FSDH Merchant Bank, at the 2026 National Credit Guarantee Company Stakeholders’ Forum, where she joined other industry leaders to discuss how credit guarantees can transform MSME financing and contribute to more inclusive economic growth.
Speaking about the role of credit guarantees in supporting structured finance, Smith observed: “We haven’t fully developed cash-flow lending as an industry, and that’s a big miss.”
It is a simple observation, but one that speaks to a much larger challenge within Nigeria’s credit market.
According to the World Bank, fewer than one in 20 Nigerian MSMEs currently have access to bank credit, while collateral requirements remain among the barriers limiting access to formal finance. The scale of the financing gap is considerable. An IFC survey estimated that Nigerian MSMEs have approximately ₦13 trillion in unmet credit demand, underscoring the extent to which businesses that require capital to expand, invest and create jobs remain underserved by the formal financial system.
The challenge, therefore, is not simply a shortage of businesses seeking credit. It is also about how lenders assess the businesses seeking that credit.
Rethinking what makes a business creditworthy
Traditional lending has understandably placed considerable emphasis on collateral. From the lender’s perspective, this provides a measure of protection against the possibility that a borrower may be unable to repay. It is therefore an important component of credit risk management, particularly in an environment where lenders must carefully manage the funds entrusted to them.
The difficulty arises when collateral becomes a proxy for creditworthiness rather than one component of a broader assessment.
A business can have a viable product, a growing customer base and relatively predictable revenues without owning significant property or other assets that can be pledged as security. A company may have successfully operated for years, consistently receiving payments from customers and meeting its obligations to suppliers and employees, yet find that its ability to access formal credit is constrained because it does not possess the type or amount of collateral traditionally required by lenders.
This is where cash-flow lending offers an important alternative perspective.
Rather than focusing primarily on what a business owns, cash-flow-based lending considers the business’s ability to generate sufficient and sustainable cash to meet its repayment obligations. Its transaction history, revenue patterns, operating expenses, payment behaviour and the predictability of its inflows can all provide valuable insight into its underlying financial health.
This approach does not mean that traditional credit assessment becomes irrelevant. Rather, it recognises that a business’s capacity to repay may be better understood when lenders consider the economic activity taking place within the business alongside its assets and other conventional indicators.
The opportunity has become even more significant as technology changes the amount and quality of information available to lenders. Digital banking and payment platforms are generating transaction data that, when appropriately analysed, can provide a more detailed picture of how businesses operate. Advances in data analytics and digital financial services are increasingly allowing financial institutions to develop alternative approaches to assessing customers who may not have extensive credit histories or conventional collateral.
For an MSME that receives regular payments through its business account, for example, those transactions can tell a story about the business that may not be immediately apparent from its balance sheet alone. The challenge for the industry is to become better at interpreting that story and incorporating it responsibly into credit decisions.
Where credit guarantees fit into the picture
Greater reliance on cash-flow information, however, does not eliminate the fundamental risk involved in lending. A lender may have reasonable confidence in a business’s ability to generate revenue and still face uncertainty around whether those projected cash flows will materialise as expected.
This is where credit guarantees can provide an important layer of risk mitigation.
A credit guarantee essentially allows another institution to share an agreed portion of the credit risk with the lender. If a borrower defaults, the guarantor covers the portion of the loss specified under the guarantee arrangement, subject to the applicable terms and conditions. For lenders, this can provide additional comfort when financing businesses whose underlying prospects may be sound but where traditional forms of security are insufficient.
The distinction is important because a guarantee does not remove the need for proper credit assessment. Instead, it can strengthen the overall structure of a transaction by reducing the level of risk borne solely by the lender.
For example, a business may demonstrate a strong and relatively predictable cash-flow profile but lack sufficient conventional collateral to support the amount of financing it requires. A credit guarantee can provide additional protection around that exposure, potentially making it easier for the lender to structure financing around the business’s actual capacity and future cash flows.
This risk-sharing mechanism can be particularly valuable for MSMEs, where the financing need may be clear but the traditional security required to meet a lender’s risk parameters may not be readily available.
Building confidence in cash-flow lending
For Nigeria to expand access to MSME finance meaningfully, however, credit guarantees cannot operate in isolation. They need to form part of a broader credit ecosystem in which lenders have access to reliable information, businesses maintain credible financial records, technology is used responsibly and regulatory frameworks support innovation while maintaining appropriate standards for risk management.
Smith highlighted this broader regulatory opportunity during the forum, noting the importance of regulators recognising credit guarantees as a legitimate form of risk mitigation and encouraging greater adoption across the banking industry. She also pointed to the need for Nigeria to develop its capacity for cash-flow lending, particularly as technology makes it increasingly possible to analyse the financial behaviour of businesses more effectively.
There are already signs of progress in the country’s credit infrastructure. Initiatives such as the National Collateral Registry, improvements in credit reporting and reforms around secured transactions have sought to make lending more efficient and give financial institutions greater confidence when extending credit. At the same time, the development of the National Credit Guarantee Company creates another mechanism through which lenders can manage the risks associated with extending finance to underserved segments of the economy.
The opportunity now is to bring these developments together.
A stronger MSME financing ecosystem should allow lenders to look at a business from multiple perspectives: its existing assets, its historical financial performance, its transaction behaviour, its projected cash flows, its industry and business model, as well as the mechanisms available to mitigate potential losses. No single indicator can provide a complete picture of creditworthiness, but together they can produce a much more informed assessment.
From access to finance to access to opportunity
The importance of getting this right extends beyond the relationship between a lender and a borrower. MSMEs account for a significant share of economic activity and employment in Nigeria, which means that the ability of these businesses to access appropriate financing has implications for investment, job creation, productivity and broader economic growth.
When a business is unable to access financing because it cannot provide sufficient collateral, the consequence may be more than a rejected loan application. It could mean an opportunity to purchase additional inventory is lost, a new contract cannot be fulfilled, equipment cannot be acquired or a potential expansion is delayed. Conversely, when viable businesses are able to access capital on appropriate terms, financing can become a catalyst for growth.
This is why the conversation around credit guarantees is ultimately a conversation about how Nigeria can make its financial system work better for productive businesses.
The objective should not be to make lending easier without regard to risk. It should be to make lending smarter, by giving financial institutions better tools to distinguish between businesses that present genuine credit risk and those whose principal limitation is simply that they do not fit neatly within traditional lending models.
Cash-flow lending can be an important part of that evolution. Credit guarantees can provide another layer of confidence. Technology can improve the quality of information available to lenders, while effective regulation can create an environment in which these tools are used responsibly.
Nigeria has no shortage of businesses with ideas, customers and ambitions for growth. The challenge is ensuring that the financial system can recognise viable businesses even when their strongest asset may not be a building, a piece of equipment or another conventional form of collateral, but the ability to consistently generate and manage cash.
The industry has not yet fully developed cash-flow lending, and that represents a significant opportunity to rethink how we assess creditworthiness and structure financing for businesses across the country.
If Nigeria is to unlock greater access to finance for the businesses that will drive its next phase of growth, we must continue to look beyond the balance sheet and find smarter, more inclusive ways of understanding the businesses we lend to.
At FSDH Merchant Bank, we believe that supporting sustainable business growth requires understanding businesses beyond the balance sheet and developing financing solutions that respond to the realities of how businesses operate and grow.