Crowdfunding and Traditional Finance: The Prospects and Challenges for SMEs in Nigeria

Start-ups and small businesses play a significant role in the modern global economy and remain a valuable source of employment and economic development (Eton et al., 2021; Blancher et al., 2019). Yet, access to finance continues to threaten their survival and hinders their growth potential in developing economies such as Nigeria. For instance, the funding gap for Nigerian micro, small and medium-sized enterprises (MSMEs) stood at about US$1.7 billion yearly pre-COVID-19 pandemic and small and medium-sized enterprises (SMEs) account for less than 1 per cent of the entire money deposit bank credit in 2018 (PwC, 2020). Typically, these businesses rely on traditional sources of finance such as friends, family, banks, angel investors, and venture capitalists (Blancher et al., 2019). However, the usual discrimination of SMEs by traditional institutions, a problem exacerbated by the global financial crisis, continues to put SMEs at a disadvantage. Consequently, small businesses began to turn to alternative sources of finance, which offer a range of cost-effective and sustainable financial services (Lakuma et al., 2019; Muneeza et al., 2018). One new financial alternative is crowdfunding which has grown exponentially since the early 2010s, due to developments in technology, the rise of digital financial services, and users’ trust in traditional providers (Wenzlaff et al., 2020; Méric et al., 2016). The potential of crowdfunding, which involves seeking financial support from large numbers of people in small amounts to reach a particular business funding objective, has been promoted as a desirable way to meet the needs of SMEs (Szabo et al., 2021; Tan and Reddy, 2020). It is also expected to help integrate SMEs into the financial net for economic development and poverty reduction.