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Doing business in Nigeria: Cost, Challenge & Risk

Do you want to know the cost and challenges of running a business in Nigeria? If you are actually serious about starting a business and you want to know the cost of doing a business in Nigeria or the challenge involve then I advise you stay tuned and read this article completely.

“There is huge satisfaction from building a successful business. It feels good when you are able to build a good team around you. It is particularly rewarding to watch people progress through your company over time whether it is through different roles, or just maturing into their positions”.

Nigeria is a country with vast business opportunities. When it comes to starting a business in Nigeria; many investors and entrepreneurs will be lured into jumping in with both feet first without knowing the cost, risks and challenges involved. The country has proven to provide a fertile ground for foreign business investors. Countries like China, South Africa, South Korea, etc. are struggling to invest or setup outlets in Nigeria. Big brands like Samsung, LG, Shoprite, Techno, Google, Microsoft, HP etc., are already in Nigeria and are quite expanding without control

Domestic businesses are also thriving very well. Successful entrepreneurs like Aliko Dangote (The Pan-African Business Mogul), Mike Adenuga (The Guru and his Enigma), Femi Otedola, Folorunsho Alakija (An Amazon Who Dares), Abdulsamad Rabiu (Truly a Chip off the Old Block) who started from scratch and built massive business empires without leaving the shores of Nigeria are evidence that doing business in Nigeria can be profitable and rewarding.

 Without wasting much of your time, let’s analyze the;

  • cost of doing business in Nigeria,
  • challenges of doing business in Nigeria, and
  • risk of doing business in Nigeria to see if actually it is rewarding to start a business

Related articles;

It’s important to understand the costs, risk and challenges of running your desired business, regardless of its size. Getting the figures right will help you determine what financing you may need to help you get off the ground, what it will take to reach your breakeven point (when you can expect to start making a profit), and manage cash flow once you’re up and running.

I don’t know where you are reading this article from. You can be reading this article from one locality in Nigeria, some other persons can be reading it from UK, United State, India, Pakistan, Cameroun, Ghana, South Africa, Philippines, Malaysia, Canada, Europe, China, Dubai, Germany, Indonesia, Jamaica, Kenya, London, UAE, USA, Australia, Turkey, India, Congo etc.; you should understand that economy and environment differ significantly and so the costs, risks and challenges of operating business in these place.  If you are actually serious about starting a business in Nigeria below are analysis of costs, challenges and risks of doing business in Nigeria. I will suggest you get yourself familiarize with them.

Cost of doing business in Nigeria

On early month of March, 2017; Central bank of Nigeria (CBN) indirectly admitted that the cost of doing business in Nigeria is very high. According to CBN, “it is component of many factors and not interest rate alone as generally perceived”. I will like to break down the costs of doing business in Nigeria into 2 categories:

Overhead costs – those costs you required to run a business, but which cannot be directly attributed to any specific business activity, product, or service. It includes things like;

  • Accounting and legal expenses
  • Administrative salaries
  • Depreciation
  • Insurance
  • Licenses and government fees
  • Property taxes
  • Rent (shop, store, warehouse etc)
  • Utilities
  • Cost of Market Research

An overhead cost of establishing a typical medium scale business in Nigeria today is roughly N1 000 000 – N2 500 000. Some overhead costs are fixed while others may change over years.

    Direct costs – These are costs you need to create products and services, such as direct materials and direct labour cost.

A rough estimate of a direct cost of running typical medium scale business in Nigeria today amounts N1 000 000 – N2 500000. Direct costs are variable cost. It changes from day to day and locality to locality.

Overhead costs + Direct costs = Total cost of doing a business.

In other words, to start up medium scale business in Nigeria today; you need a rough estimate of N2, 000,000 – N5, 000, 000 (two million to five million naira).

Note: Cost of doing business in Nigeria vary from one state to another, from one locality in Nigeria to another. You don’t expect the cost of fishing farming in Anambra where there is availability of land for building fish pond to be the same with the cost of fishing farming in Lagos that you hardly find land to build fish pond.

Challenges of doing business in Nigeria

There are general business challenges that can affect business start-up all over the world but when you consider the economic and environmental challenges; it varies from region to region. So, below are the challenges of doing business in Nigeria;

  1. government borrowing

Government is borrowing at 18 per cent, 20 per cent and zero risks.  How can you as a private sector business compete favourably? This is why all funds in Nigerian economy now are going into treasury bills, the federal government’s wallet. This has made it very difficult for the private sector to play its role in the economy in terms of this rescue mission. As it is now, there is no way you can compete with government in the financial market, even the banks; they would rather buy treasury bills and bonds than to give money to manufacturers.

On account of interest rates, ranges between 25-30 per cent. How can domestic investors invest profitably when you are having an interest rate of 25-30 per cent?

If you really want to start up a business and you don’t have enough capital, I will advise you source your fund through angel investors and relatives rather than borrowing from Government or banks. This is the best way to avoid the challenge of government’s zero risks borrowing.

  1. No incentives and subsidy for domestic investors

There are no incentives for domestic investors to even play significant roles, and these are the kind of things that shape economy and the investments people do. Because as they say, “an economy gets the kind of investments it deserves.” It is the incentives, the policy that determines the kind of business people will do, and that is why there are so many disincentives for investors to go into real sector (Manufacturing, Agriculture, Solid minerals) investments because of the issue of cost of funds.

  1. Lack of Basic infrastructure/technology

Nigeria lacks the basic infrastructure and logistics that support medium and large scale businesses. There is a poor internet service. If you are going to run a successful business in Nigeria; then you must have the financial capacity to provide your own basic Infrastructures.

Take for example, you want to start soap production firm in Nigeria; you will need to provide your own water supply, electricity and other amenities that are required for smooth running of this business.

This very single factor prolongs the time frame from initial planning to full business operations when compared to developed countries that have the basic infrastructure in place. Lack of basic infrastructure will either directly or indirectly increase your overhead costs. So, ensure you factor in this challenge during your business planning.

  1. Erratic Power Supply

This is a serious factor grossly militating against the growth of small and medium scale businesses in Nigeria. Top companies operating in Nigeria has found a way to deal with the challenge of erratic power supply by providing their own energy supply.

Moreover, there is serious improvement in power supply in Nigeria this year. The power sector has been deregulated and the licenses given to private investors to run their own independent power stations. So much has been going on in that sector and a lot have improved.  However, the improvement simultaneously goes with the high charge of electricity bill.

  1. Inadequate Security

If you are a foreigner wanting to invest in a business in Nigeria, you seriously need the service of security agent(s). This doesn’t mean that domestic businesses do not need security. Every business in Nigeria needs security. But I think it’s worthwhile to say that there has been a massive beef-up by the government with respect to security. However, I don’t think the security challenge has completely been eradicated or going away anytime soon; so you have to be prepared to deal with it.

  1. Inconsistent Government policies

Government make policies that on many occasions militate against operation of business in Nigeria. Governance is something investors and entrepreneur have no control over; all entrepreneurs can do is try to influence government’s policy with respect to enacting favourable business laws. But you must have a political god-father and massive resources to be able to influence government laws. Unfortunately, you may not have such political godfatherism or financial capacity to influence government’s policy. So, the best strategy you can adopt to combat the ever changing policy of the government is to keep an eye on government laws and swiftly adjust your business to align with these policies.

  1. Bad road network and poor transportation system

The source of raw materials you need may not be situated close to your target business location. So, it is now left for you to decide if to locate your business close to the raw materials or close to your market. Whether, it is the transportation of raw materials or finished products that is involved; bad road network and poor road standard will always pose a great challenge if you intend operating a business in Nigeria. Poor transportation system and bad road network is one of the militating factors against industrialization in Nigeria but the government are seriously tackling it through the construction of new road, upgrade of old roads as well as reconstruction of railway line.

8. Corrupt practices

The last but not least of challenges of doing business in Nigeria is corrupt practices.  These corrupt practices include things like: unnecessary levies and duties, bureaucratic bottlenecks at various government agencies like CAC, NAFDAC, etc; high cost of obtaining business licenses and permits.

it is worth to note that in spite of all these challenges listed above, businesses (both domestic and foreign) still flourish in Nigeria. So, I don’t think you should be discouraged by the challenges. A good business strategy that has work magic is the development or formation of strong business management team that will tactically position your business to withstand high inflation and the ever increasing demands of the government.

Risk of Doing Business in Nigeria

Doing business in Nigeria is NOT risky as perceived by many Foreigner. I have listed some genuine companies above who thriving very well in Nigeria.

The High population of Nigeria has made the country target market for many businesses. If you take a good look at the population statistics in this business, you will not hesitate to start a business if you’re in Nigeria.

The federal government, especially the present administration is making some effort to support both small and medium scale Agriculture enterprises in Nigeria. The increase tariff for the importation of used cars is to encourage the indigenous manufacturers like Innoson (IVM) and also attract foreign car manufacturers like Honda, Toyota, Nissan, etc into the country. In addition to all these the present government macroeconomic policies and, economic and business growth strategy and support plans are worth commendable.

The cost of doing business in Nigeria is considerably high however with strong management team and proper positioning of the business. It is highly rewarding doing business in Nigeria. The challenges and risk involved can be minimize. I always frown at those who do say I can’t make it doing business in Nigeria.