Modelling business failure among small businesses in Nigeria

Abstract

Purpose -Despite the reported high bankruptcy rate among small businesses (SMEs) in Nigeria, this study is the first to develop failure prediction models specifically for SMEs using financial and non-financial variables. Methodology -The study employed logistic regression to a sample of 344 SMEs during the period 2000-2014. Findings-The increased in the predictive accuracy of the model shows that data relating to the age of business and location make a significant contribution. Additionally, the study finds that high leverage and operational expenses and low profitability are associated with SMEs failure. The prediction accuracy rate was 92.1 and 93.8 percent for model 1 and model 2 respectively. Conclusion-The findings will serve as an early warning signal for management to take proactive measures to overcome the threats of failure. Financial institutions such as banks will benefit from this study as it will help them set their internal control systems and procedures to manage credit risk for SMEs.