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Eligibility Requirements For Business Loans In Kenya

Kelvin Kiogora
April 22, 2022

After much thought, you’ve decided that you need to take a business loan – either to purchase inventory, provide you with cash to fulfil a huge order, or even cover operation costs during tough times. 

However, there’s one question lingering on your mind. Does your business qualify for a business loan?

Before you start applying for a business loan, it’s always a good idea to check your eligibility so that you don’t waste your time applying for loans for which you don’t qualify. Knowing the eligibility requirements in advance also helps you get your ducks in a row before starting the application process, thereby increasing your chances of qualifying for the loan.

While different lenders have unique eligibility criteria for business loans, some eligibility requirements are common to most lenders.

With this in mind, let’s take a look at some of the most common factors lenders look at to determine whether you are eligible for a business loan.

1. Business Registration Status

The first thing most lenders will want to see is proof that your business is legally registered. Without this, you can forget about qualifying for a business loan.

There are different documents that can prove that the government recognises your business as legally registered. The documents required as proof of legal registration depend on the type of business. These include:

  • Certificate of Registration: This document shows that you have the legal authority to do business as a sole proprietor or a partnership. For this type of business, the owners are not treated as separate entities and are therefore personally liable to pay back the loan if the business defaults on its debts.
  • Certificate of Incorporation: This document shows that a business is registered as a separate legal entity from its owners. Certificates of incorporation are used as proof of registration for limited liability companies. For this type of business, the company directors and shareholders are not personally liable for the company’s debts, unless they have given a personal guarantee for the loan. .
  • Other necessary permits and licences: Aside from the business registration documents, you’ll also be required to provide other permits and licences required to operate the business. These will vary depending on your business location and the nature of the business.

It’s good to note that having a legally registered business doesn’t automatically mean that you are eligible for a business loan. The type of business might also affect your eligibility. For instance, sole proprietorships and partnerships might be ineligible for some types of loans that limited liability companies can access.

2. Time In Business

One in five small to medium-sized enterprises (SMEs) in Kenya do not live beyond their first birthday, and only 3 out of 10 SMEs go beyond the three-year mark. With such statistics, it is not surprising that most lenders want to know the age of your business.

The high failure rate means that lending to new businesses is a considerable risk to lenders since they cannot be too sure whether your business will stick around long enough to repay the loan. Therefore, most lenders have a minimum length of time that your business needs to have been in operation to be eligible for a business loan.

The minimum amount of time a business needs to have been in operation to be eligible for a business loan in Kenya ranges from three months to three years. However, this will depend on the type of business loan you are applying for and the loan amount.

Generally, bigger loans have more extended time-in-business requirements. Similarly, unsecured loans have longer time-in-business requirements. The length of time your business has been in operation may also affect other vital aspects of the loan, such as interest structure, interest rates, and the repayment period.

Another essential thing to keep in mind here is that lenders don’t count the age of a business starting from the moment you registered the business. Instead, they look at how long the business has had an open bank account.

3. Personal Credit History

Even though you are applying for a business loan, lenders may still want to know about your personal credit history. This is particularly important for sole proprietorships and partnerships.

With sole proprietorships and partnerships, you are personally liable for the business’s debts. If your personal credit history is poor, this presents a risk for the lender and can affect your eligibility. Therefore, expect the lender to check whether you have a negative listing with Credit Reference Bureaus (CRBs).

To avoid being caught unawares while applying for a loan, you can request your personal credit report from a CRB (costs between Ksh250 to Ksh650) and check whether the information contained in the report is correct.

In case of inaccuracies, follow up with the relevant financial institutions to clear up the inaccuracies. Doing this will get everything in order before you start your application and increase your chances of qualifying for the loan.

4. Business Credit History

Just like you have a personal credit report, so does your business. If your business has a poor history of repaying loans, this positions your business as a high-risk borrower and negatively affects your chances of qualifying for a business loan.

Therefore before you start applying for a business loan, it’s good to ensure that your business doesn’t have any loans that are in default. 

Even when you’re not actively looking for a new loan, it’s always good to pay back your other business loans on time. This will improve your business credit report and boost your chances of qualifying for a business loan.

You can also request your business credit report from CRBs and confirm whether the information in the report is accurate to avoid surprises during the application process.

5. History With The Lender

To be eligible for a business loan, some lenders will require you to have maintained an active account with the lender for a given period. For most lenders in Kenya, this typically ranges between 3 months to 1 year. However, this varies based on the type and size of the loan you are applying for, even when borrowing from the same lender.

Once you have identified a potential lender, remember to check if they have such requirements before preparing your loan application documents. 

It’s good to note that some lenders will approve you for business loans even if you don’t have any history with them. However, they might instead ask for bank statements for a given period, usually three months to 1 year.

In addition to having an active account for a specified period, some lenders might also require you to have a certain amount of money saved in your bank account for you to be eligible for a loan. This is especially common when you’re borrowing from Savings and Credit Co-operative Societies (Saccos).

In such situations, the loan amount usually depends on the saved amount. For instance, some lenders will loan you up to 3 times your saved amount, meaning that if you have Ksh500,000 saved, for example, you’ll be eligible for a loan of up to Ksh1.5 million.

6. Revenue, Profits, And Cash Flow

This is one of the most crucial qualification requirements for business loans. Before any lender can give you money, they have to be confident that your business brings in enough money to repay the loan.

Imagine you want a loan that will require you to pay Ksh100,000 every month. However, your small business only brings in Ksh90,000 in monthly revenue. It is very unlikely that any lender will give you the amount in question in such a situation because your business revenue is not enough to cover the monthly instalments.

Sometimes, a business might have sufficient revenue, but that does not automatically mean that it is capable of repaying a loan. Once again, let’s imagine you want a loan that needs you to pay Ksh100,000 every month. You also have a business that brings in Ksh500,000 every month. However, you pay Ksh410,000 in business expenses every month.

In this situation, your business has sufficient revenue but is still not profitable enough to pay off the loan. To avoid such situations, lenders will also want to look at the profitability of your business before approving you for a loan.

The next financial metric lenders look at is your cash flow. Sometimes, even profitable businesses have cash flow problems. For instance, if your business deals with clients who routinely delay paying invoices, this can cause cash flow problems and affect your ability to service the loan regularly.

Therefore before you start applying for a business loan, it’s a good idea to look at your business cash flow and determine whether your business can actually afford a loan. As a diligent business owner, you should do a cash flow analysis every month, or at least every quarter. Knowing how money flows through your business in advance makes it easier to optimise your cash flow before applying for credit.

When reviewing your business financials, most lenders will ask you to provide several or all of the following documents:

  • Bank statements
  • Balance sheets
  • Income statements
  • Accounts receivables
  • Cash flow statements
  • Profit and loss statements
  • Tax compliance certificate

7. Demonstration Of Future Business Viability

Revenue, profits, and cash flow tell lenders how your business has been performing in the past, but they don’t tell much about how it will perform in the future, which is as important to lenders. Just because a business was profitable for the last three years doesn’t mean it will remain profitable for the next five.

To get a better idea of the expected future performance of the business and determine whether it will be able to meet its debt obligations, lenders will also want to see your future financial projections. Here, you might need to provide projected reports like cash flow statements, income statements, and balance sheets.

This requirement usually applies to limited liability companies, but some lenders might still want to see the projected financial reports even for sole proprietorships and partnerships as they see fit.

8. Current Amount Of Debt

If your business has some other outstanding debt, this will affect your ability to pay off another loan, so it’s something lenders will want to know before approving you for a loan. However, having other outstanding debt doesn’t automatically make you ineligible for a business loan.

To determine whether you qualify for a business loan when you have other debt, lenders look at a metric known as debt-to-income ratio, a financial metric that compares your monthly debt payments to your monthly gross income. Debt-to-income ratio is expressed as a percentage.

Let’s say you have an existing loan with monthly payments of Ksh50,000, while your gross income is Ksh200,000. Here, your debt-to-income ratio is 25%. A high debt-to-income ratio increases your risk profile as a potential borrower, thus making you less likely to qualify for a business loan.The lower, the better. 

9. Purpose Of Loan

When applying for a business loan, most lenders will want to know how you intend to use the funds. Sometimes, the purpose of the loan can affect whether you qualify for the loan or not.

For instance, if the reason for borrowing money is to pay off existing debt, your application might be rejected. Similarly, if the amount you are requesting doesn’t match the purpose of the loan, this could affect your eligibility.

In comparison, most lenders will approve your business loan request for the following purposes:

  • To purchase equipment and machinery
  • To purchase business assets like property and vehicles
  • To improve your cash flow
  • To purchase inventory
  • To cover payroll
  • To expand your business

To increase your chances of qualifying for a business loan, you need to be very detailed when explaining the purpose of the loan. For instance, instead of asking for Ksh1 million to cover working capital, you’ll stand a better chance of qualifying if you break down how you’ll use the money.

For example, you could say that you’re going to use Ksh400,000 to purchase additional inventory, Ksh500,000 to upgrade your business equipment, Ksh100,000 to ramp up your advertising campaigns. 

10. Collateral For Secured Loans

Small business loans are usually unsecured, which means that you’ll most likely be eligible for the loan even if you don’t have any assets to provide as collateral.

On the other hand, large loans are usually secured due to the higher level of risk they carry. For such loans, your eligibility rides on your ability to provide something of value as security for the loan. If your business cannot repay the loan, the bank may seize the collateral and sell it to recoup their money.

Examples of business assets that you can use as collateral for a loan include title deeds, motor vehicle log books, debentures on assets, unpaid invoices, inventory, equipment and machinery, certificates of deposit (CDs), stocks, and so on.

If your business doesn’t have enough assets to act as collateral for a loan, some lenders will allow you to provide personal assets, such as homes and personal vehicles, as security. This is particularly common for sole proprietorships and partnerships.

For businesses borrowing money to finance the purchase of assets, such as machinery, equipment, buildings, or motor vehicles, it is possible to use the underlying asset as collateral for the loan. In the event of default, the financier will simply sell off the asset and recoup their money. However, you might end up losing any equity you had built in the asset.

11. Guarantors

Depending on the nature of your business and the type of business loan you want, you might be required to provide a guarantor for you to be eligible for the loan. This is particularly common for sole proprietorships and partnerships. A guarantor is an external party who agrees to be liable if your business cannot clear its debt.

For limited liability companies, lenders will sometimes require the business owners or directors to provide a personal guarantee for the loan. This effectively transfers the liability of the loan from the company, which is a legal entity of its own, to the owners. If the business defaults, the lender can seize the owners' or directors’ personal assets to recoup their funds.

12. Business Industry

It might sound surprising, but the industry your business operates under can be a factor in determining whether you qualify for a loan or not. This is because different industries carry different levels of risk for lenders.

For instance, if you operate in an industry with a historically high failure rate, this might negatively affect your chances of qualifying for a business loan with most lenders. Therefore, before you start preparing your loan application, it is a good idea to contact different lenders and find out whether businesses operating in your industry are eligible for loans.

Your industry also affects the kind of loans for which you are eligible. For example, many commercial lenders in Kenya have a class of loan products targeted at the agri-business sector. If you are not in the agri-business sector, that means you’d not be eligible for such loans. The same case applies to other industries. 

The upside to these industry-specific loan products is that they will typically be tailored to the context of your industry such as interest rates favourable to your industry type and a possibility for more flexibility in repayments. 

13. Business Plan

While it is not an absolute necessity for you to be eligible for a business loan, some lenders will nonetheless ask to see a business plan, particularly if your business is a startup.

Since startups don’t have financial data like revenue, profits, and financial statements to show the viability of their business, lenders rely on business plans to determine whether the business is viable and capable of repaying its loans.

Some of the things lenders will want to see on your business plan include the purpose of the loan, your financial projections, industry outlook over the loan's lifespan, and your competitive business advantage.

If your business plan is deemed to be not well-thought-out or your plans and projections do not seem viable, this can negatively affect your eligibility for the loan.

Commonly Required Documents When Applying For A Business Loan

If you’re planning to apply for a business loan, gathering all the documents you need in advance will make the application process smoother and boost your chances of qualifying for the loan. Below are some of the documents you might be required to provide when applying for a business loan in Kenya:

  • National ID card
  • KRA PIN
  • Passport size photos
  • Certificate of Business Registration (for sole proprietorship and partnerships)
  • Certificate of Incorporation and trade licences (for limited liability companies)
  • Business permits and licences
  • Audited financial statements
  • Bank statements
  • Records of accounts receivable and payable
  • Projected cash flow, income statements, and balance sheets
  • Personal and business annual tax returns
  • Tax compliance certificate
  • Proof of collateral
  • Payroll records
  • Business plan
  • Legal contracts and agreements with clients and suppliers (for loans such as invoice discounting and LPO financing)

WRAPPING UP

Qualifying for a business loan is not difficult, but you need to meet all the lenders’ requirements and criteria, which we have covered in this guide.

Here’s a recap of the standard eligibility requirements you need to meet to qualify for a business loan:

  • Proof of business registration status and all necessary permits and licences
  • Have operated the business for the minimum required time, which typically ranges between 3 months to 3 years, depending on the type and size of the loan you are requesting.
  • Good personal and business credit history
  • An active account with the lender for a specified length of time, which will vary from one lender to the other
  • Financial documents to show your revenue, profits, and cash flow
  • Demonstration of future business viability
  • Disclosure of current amount of debt
  • Disclosure of the purpose of the loan.
  • Collateral (for secured business loans)
  • A business that operates in an eligible industry
  • Guarantors
  • A business plan (usually required for startups).

If your business meets all the requirements and criteria, you can use our business loan finder tool to find the right loan for you. 

Kelvin is a top-notch writer whose passion is to help businesses maximize their reach and conversion through excellent and engaging content. He has the uncanny ability to make the most complex subject matter simple and easy to understand. You can find Kelvin on Linkedin.

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