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Business Loans

FULL GUIDE: All You Need to Know About Business Loans in Kenya

Kelvin Kiogora
April 6, 2022

As a business owner, you’ve probably thought of taking a loan at one point to boost your business.

Business loans are a good source of money to fund your startup, finance the acquisition of business assets, keep your business running during tough times, or even pay for inventory required to fulfill a large order.

Unfortunately, there isn’t much information about business loans in the Kenyan market. What types of business loans can you get? Are you even eligible for a business loan? What institutions can you go to for these loans? What are the risks of taking a business loan?

In this guide, we’ll answer all these questions and provide any other information you need to know before taking a business loan. Before we get into all this, however, let’s understand what business loans are.

What Is a Business Loan?

A business loan refers to a lending agreement between a business owner and a bank, lending institution, or private lender. The money lent is used for business purposes and has to be repaid within a certain predetermined period and with an agreed-upon amount of interest.

The critical difference between a business loan and a personal loan lies in the intended use of the funds.

With personal loans, there are no restrictions on how to use the loaned money. Once you take a personal loan, you can use the money to pay for school or vacation, buy a car, buy land, take care of an emergency, or even start a business.

With a business loan, on the other hand, you are restricted from using the loan funds for purposes that are not related to your business. For instance, you’ll not qualify for a business loan if you intend to use the money to pay for a wedding or purchase a personal vehicle.

Types of Business Loans

There are several different types of business loans, each suitable for different situations and comes with different requirements. Here are some of the most common:

Term Loans

These are business loans where you receive a lump sum of money, which you have to pay back within a predetermined period (the term). Payments are usually made in regular installments, and in most cases, the term loan comes with a fixed interest rate.

Term loans can be divided into short-term loans, which have a repayment period of 3 – 24 months, and long-term loans, which have a repayment period of 2–10 years.

Business Lines of Credit

A line of credit is a dynamic type of business loan that allows you to access and repay funds as many times as you want within a predetermined draw period, provided you don’t exceed the given credit limit.

For instance, if your business line of credit has a Ksh1 million limit, you can withdraw Ksh100,000 from the facility today, another Ksh300,000 tomorrow, and Ksh200,000 the next day.

The more money you borrow from the facility, the less money you have accessible to you. However, repaying the borrowed money gives you access to the full credit limit again.

For instance, if you have borrowed a total of Ksh800,000 out of the Ksh1 million limit and repay Ksh600,000, you’ll have Ksh800,000 accessible to you.

Equipment Loans (Asset Finance) 

This type of loan is targeted at businesses that want to acquire business equipment and assets, such as industrial machinery, medical equipment, construction equipment, heavy commercial vehicles, cars, and IT systems and equipment.

One of the greatest benefits of equipment loans is that you don’t need to provide collateral in most cases. Instead, the lender uses the underlying asset as collateral for the loan. In other words, they retain ownership of the asset until you clear the loan, after which ownership is transferred to you.

Commercial Real Estate Loans

These are a type of equipment/asset loans targeted at businesses that want funds to finance the acquisition of real estates, such as a manufacturing facility, shop space, or office building.

Like equipment loans, you typically don’t need to provide collateral for real estate loans since the underlying property acts as collateral. Commercial real estate loans have an added advantage in that they allow you to build equity in the property over time.

Invoice Discounting

This is a unique loan type that allows businesses to convert their unpaid invoices into instant cash. 

If your business needs money today, but your next invoice is not due for another 60 days, you can provide the invoice as collateral for a loan. Once the invoice is paid, the money then goes towards repaying the loan.

LPO Financing

LPO financing is a short-term business loan that provides businesses with the funds they need to acquire inventory to fulfill a customer’s order. LPO financing is typically used for large orders that a business cannot service on its own.

To qualify for invoice financing, you have to provide a signed local purchase order (LPO), which proves that a company has indeed procured goods from your business.

LPOs are a great financing option for growing businesses since they allow these businesses to take on large orders that they otherwise wouldn’t be able to fulfill on their own. However, LPO financing can be a costly type of credit.

Business Credit Cards

This is similar to personal credit cards, only that they are issued to business accounts and are meant for business expenses. Business credit cards are a great way for businesses that are short on cash to finance their day-to-day operations and short-term expenses.

Overdraft Loans

An overdraft loan is a credit arrangement that allows businesses to withdraw more money than they have in their account.

For instance, if you only have Ksh400,000 in your business account but need to make a Ksh500,000 payment, an overdraft facility will allow you to make the payment even if you don’t have the full amount in your account.

The lender then recoups their funds plus interest when you deposit money into your business account.

Business Cash Advance

This is a type of credit facility that loans money to businesses against their future sales. You receive a lump sum of money from the lender and allow them to take a portion of your daily sales until they recoup their money plus interest.

Government Sponsored Loans

These are a class of loan schemes initiated by the government and are usually targeted at business owners from marginalised groups, such as women, youth, and persons with disabilities.

Examples of business loans initiated by the government include the Youth Enterprise Development Fund, Uwezo Fund, and the Women Enterprise Fund. These were in 2021 all consolidated into the Biashara Kenya Fund

Eligibility Requirements for Business Loans

Having a business does not automatically make you eligible for a business loan. Below, are some of the factors lenders use to determine whether you qualify for a business loan:

  • Business registration status: Before you can qualify for a business loan, most lenders will require proof that your business is legally registered. To prove this, you might be required to show a certificate of business registration or certificate of incorporation and other necessary permits and licenses.
  • Time in business: Most lenders prefer lending to established businesses over startups, so your eligibility for a business loan will often be tied to the length of time your business has been in business. Many lenders in Kenya have a minimum business age requirement of between 3–36 months. The length of time you have been in business will also affect the loan amounts you qualify for.
  • Personal credit history: Your personal credit history impacts your chances of qualifying for a business loan, particularly for sole proprietorships and partnerships. If you have a poor personal credit history, this could result in your business loan application getting rejected.
  • Business credit history: Like personal credit history, your business credit history also influences your eligibility for business loans. A good business credit history will increase your chances of qualifying for a business loan, while poor business credit history will hurt your chances.
  • History with the lender: Some lenders will only give loans to businesses that have maintained active accounts with the lender for a specified period. The length of time will vary from one lender to the other. In some cases, the loan amount you are eligible for will depend on the amount you have saved with the lender.
  • Revenue, profits, and cash flow: Before loaning you money, lenders will want to make sure that your business can repay the loan. To determine this, they will ask to see various financial metrics, including your revenue, profits, and cash flow. The healthier your business is financially, the more likely you are to qualify for a business loan.
  • Demonstration of future business viability: Profitability today does not translate to profitability tomorrow. Therefore, before loaning you money, lenders will want you to show that your business will continue making money even after giving you the loan. Here, you’ll need to show your financial projections to demonstrate your future business viability.
  • Current amount of debt: If you have some outstanding business loans, this could affect your chances of qualifying for another business loan. To determine whether to approve you for another business loan, lenders look at your debt-to-income ratio, which is the ratio of your monthly debt payments to your gross monthly income. A high debt-to-income ratio translates to higher risk and thus lower chances of qualifying for a business loan, or in the least, reducing the amount you can qualify for.
  • Collateral: Depending on the lender and the loan amount you are applying for, you might be required to provide collateral to be eligible for a business loan. The collateral is an asset that the lender can sell to recoup their money in case you default on your loan.
  • Business industry: The industry your business operates in can affect your eligibility for business loans, as well as the kind of loans you qualify for.
  • Business plan: Some lenders will ask to see your business plan to determine whether you qualify for a business loan. This mainly applies to startups seeking startup capital, but it can also apply to established businesses.

Institutions Offering Business Loans in Kenya

There are four main financial institutions that offer business loans in Kenya. These are:

Commercial Banks

These are large financial institutions offering money deposit and withdrawal services and loans to the general public. Due to their size, most commercial banks offer multiple types of business loans. However, their approval requirements are usually more stringent than other types of lenders.

Microfinance Institutions

Microfinance institutions are very similar to commercial banks, but their services are usually targeted at more niche markets. They also have a wide variety of business loan products, but they have less stringent eligibility requirements compared to banks.

SACCOs

Known as Savings and Credit Cooperatives Societies in full, these are credit unions that pool money and allow members to access the money in the form of loans.

Saccos are the preferred option for a lot of business owners looking for business loans due to their low-interest rates and low eligibility requirements. However, the amount of money you can borrow from a Sacco usually depends on your savings. Many Saccos give savings of two to four times your savings amount.

Digital Lenders

You can also access business loans from the many digital lenders that operate in the country. Digital lenders allow you to borrow money through your phone, with the money sent directly to you through your mobile wallet.

The most significant advantage of digital lenders is that they offer unsecured loans. They are also an excellent option for businesses looking for instant cash since the money is sent to your phone within minutes of making the application.

On the flip side, the loan amounts are usually small due to the unsecured nature of the loans. In addition, their interest rates can get very high sometimes.

When Should You Take a Business Loan?

You might be eligible for a business loan, but that doesn’t necessarily mean that you need to take one. Oftentimes, taking a business loan can be a sage decision, but sometimes, business loans can bog your business down with debt and even lead to bankruptcy.

So, when or why should you take a business loan? Here are four smart reasons for taking a business loan.

To Expand Your Business

Business has been doing exceptionally well, and the next logical decision is to expand. This could mean moving to bigger premises, opening a new branch, or hiring more staff. There’s one problem, however. You don’t have enough money to fund the expansion.

In such situations, taking a business loan to fund the expansion can be a wise move. Term loans are particularly ideal for funding business expansion since you can get large amounts of money and relatively long repayment periods.

To Acquire Business Assets

Having your own business assets leads to reduced costs in the long run. For instance, if you have your own office building, you cut the cost of rent. If you own your own equipment, you don’t need to hire other companies to do things for you. If you have your own heavy commercial vehicles, you don’t need to hire another company to transport goods for you.

The problem is that many of these assets cost a lot of money, which your business might not have lying around.

If owning an asset makes more business sense than hiring or renting, you can take an equipment or commercial real estate loan to help you acquire the asset.

To Purchase Inventory

Sometimes, your business might need to purchase large amounts of inventory but not have enough cash on hand to do so.

Imagine, for instance, you need to purchase inventory to prepare for the holiday season sales but don’t have enough money for this. In such a situation, a business loan can be a lifesaver.

There are several types of business loans that you can take to fund inventory purchase, including overdraft loans, business cash advance loans, business credit cards, business lines of credit, or invoice discounting.

To Take Advantage of a Business Opportunity

Sometimes, you come across a business opportunity that you can’t just pass up. Let’s say, for instance, you’ve come across an opportunity to handle a large tender, but don’t have enough money to fulfill the tender.

Taking a business loan can be a great way to raise funds and take advantage of such an opportunity. Before taking the loan, however, you should determine the return on investment so that you don’t end up with a loan that costs more than the return from the opportunity.

To Avoid Cash Flow Problems

Cash flow is very important for businesses. Imagine, for instance, you have an invoice for a large order due in two months. However, you have expenses that need to be paid today, such as utilities, rent, or staff payroll.

Such a situation creates a cash flow problem because the business is making sales but doesn’t have enough cash on hand to cover its immediate expenses. To avoid such problems, you can take a loan to cover the day-to-day operations while waiting for your accounts receivables to be paid.

Considerations When Taking a Business Loan

Before applying for a business loan, there are some considerations that you need to keep in mind to choose the most suitable for you. Here are some of these considerations:

Reason for Taking the Loan

Why do you need a business loan in the first place? The answer to this question will help you determine the best type of loan for you.

For instance, LPO financing might be suitable if you need money to fulfill a client's order. However, if you’re borrowing money to purchase IT equipment for your company, you should consider getting an equipment loan.

Determine How Much You Need

The amount of funding you need will depend on the purpose of the loan. For instance, if you need to purchase a lorry for your business, the loan amount should be enough to cover the cost of the lorry.

Similarly, if you are borrowing money to fulfill a client’s order, the amount should be able to cover the cost of purchasing inventory and delivering it to the client.

How Fast Do You Need the Money?

If you need money fast, such as when you need to take advantage of an unexpected business opportunity, you’ll want to borrow from a lender with short approval times. In such a situation, it might make more sense to borrow from a digital lender, for example.

If you are borrowing money for a planned expense, on the other hand, there’s no rush, which means you can go with conventional lenders like commercial banks, which often have longer approval processes.

Shop Around for The Best Terms

Now that you know why you need a loan, how much you need, and how fast you need it, the next step is to shop around and find lenders who will give you the best loan terms.

Here, you’ll need to talk to multiple lenders and find out their interest rates, loan repayment period, loan processing charges, and so on. Alternatively, you can use our business loan finder tool to compare different lenders and find the best loan for you in minutes.

Potential Risks of Business Loans

Business loans can be a great way to grow your business or take it through a rough patch, but they are not without their downsides. Here are a few potential risks that come with business loans:

  • Loan default: Things don’t always go as planned. For instance, a business might take a downturn after you’ve taken a loan, affecting your ability to repay the loan. This can lead to unexpected consequences, such as getting sued, getting listed as a loan defaulter, business or personal property being auctioned, or having your company dissolved.
  • Loss of assets: If your business loan is secured against business assets, there’s always the risk of the lender seizing the assets if you cannot clear the loan.
  • Personal liability: If your business assets cannot cover a loan that is in default, you can easily become personally liable for the loan, which means that your personal assets could be used to repay the loan. Sole proprietors are particularly susceptible to this risk.
  • Higher debt-to-income ratio: Taking a business loan increases your business’s debt-to-income ratio, making it harder for your business to access loans in the future while servicing existing debt. 

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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