Every business that grows to become self-sustainable reaches a point where it needs external funding. Unfortunately, the experience for many entrepreneurs in Kenya is having their loan application rejected.
Have you experienced this? It’s the norm world over. According to a World Bank report, MSMEs only have just over a quarter of their financing from external sources. Big businesses have 50% of their finances from external sources.
There has been little will to ease things for small businesses. Whether it’s for business, asset finance or overdraft; a loan application is more often a source of disappointment for business owners. But like with other aspects of running a business, you can improve your chances by knowing where you go wrong or what’s actually happening.
1. Collateral requirement
The business loan is the most popular loan application among entrepreneurs in Kenya. It requires collateral. Loans in Kenya are issued on the basis of collateral and not trust – from your track record of paying back debt – and that is a problem. But the growing importance of the Credit Reference Bureaus (CRB) is expected to change this.
Many women in Kenya don’t own assets and therefore resort to compromises like inventory hypothecation – where you tell the bank they can take your inventory if you default. But banks and SACCOs require assets with much more value like land and buildings. You can also offer logbook and equipment/machinery.
In the end though, this is an issue of banks showing flexibility in security requirements and ownership of assets by women.
2. Financial records
We’ve gone over this many times. You need to prepare your balance sheet to show quality and value of assets, income statement to show viability of your business. You also need a cash flow statement to reveal your ability to service the loan should your loan application go through.
More than that, small business owners in Kenya are advised by financial institutions to present budgets and forecasts as well. Remember strategic management? All these records are to show if you are able to repay the loan. Informal businesses have little chance since they are presumed to have unreliable records.
3. Wrong institution
Researcher, Andia Chakava says on women entrepreneurs in Kenya, “I think women are not just looking for money and repayment. Instead, they are saying, are you going to walk with me so that we grow this business.” She was revealing a finding that 70% of women in East Africa avoid business loans entirely.
Sometimes, you’re simply expecting the right things from the wrong kinds of people. It is difficult for large financial institutions to truly engage at the level of MSMEs. That is why SACCOs and smaller banks are always fronted as the better alternative for Kenyan entrepreneurs. These are usually closer to your business action. They understand (we do too!).
4. Past performance
Many Kenyan entrepreneurs share the experience of being asked to bring along a number of things for their loan application. It’s like a going to a mganga. You may have been asked to bring one-year financial and bank statements or tax compliance certificate.
Financial institutions use your past performance as the marker of how you will do in the future. That’s obviously bad news for a new business. It’s also bad if you’re coming off 2017. One way advised to bypass this is emphasize your good prospects using forecasts and your past creditworthiness.
There’s more demanded from entrepreneurs by financial institutions in Kenya. “Borrowers are required to seek property valuation, legal registration before accessing credit and even then it’s not guaranteed hence incurring upfront cost defeating the whole purpose of seeking funds.”
This cumbersome process is because information is not easily available on compliance with documentary requirements of a business loan application in Kenya. Neither is it standardized. This is why it is insisted that you shop for loan in order to compare.
6. Borrowing strategy
Two strategies used by entrepreneurs in Kenya have come to life. Many borrow to cover operational problems – like working capital problems. This is already an indicator, for financial institutions, that your loan request is not viable. Expectation is that business loans are to be used to expand your enterprise to meet growing demand or opportunities.
Another is not focusing on the issue of repayment. When all is said and done, banks plus SACCOs only want to know whether you can repay on that loan application. The message to drive down the loan manager is that you can in fact repay his/her loan.
MSMEs are considered risky. Typically, the team is inexperienced and the businesses depend on a handful of suppliers and customers. Sometimes it’s a single supplier (not marital status, ha!) or a dominant customer. This makes it easy for things to go wrong.
Small businesses can reduce this risk by demonstrating a deep understanding of their industry, to reassure the bank or SACCO. As a business owner, you can also put together a very good team that will increase confidence of the financial institutions in you.0