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Types of Business Loans In Kenya

Kelvin Kiogora
April 22, 2022

Business loans can be a lifesaver when you want to expand your business, maintain good cash flow while waiting for clients to pay up, or even cover payroll during low seasons.

Before taking a business loan, however, you need to think about all the options available to you and figure out which kind of loan is best suited to your needs.

This guide will cover the different types of business loans available in Kenya and help you understand how each works and the circumstances under which you should consider the different types of business loans.

1. Term Loans

This is a common type of business credit where a lender gives you a lump sum of money, which you then have to repay in regular installments over a predetermined period. Terms loans usually offer a fixed interest rate throughout the loan term.

Term loans are a good option for businesses looking to expand their operations, as well as companies that have established good creditworthiness.

One significant advantage of term loans over most other kinds of business loans is that you can borrow significantly high amounts. For example, some lenders allow you to borrow as much as Ksh250 million. Term loans also offer better interest rates than most other types of business loans.

Terms loans can be further broken down into two types – short-term and long-term business loans.

Short Term Business Loans

These are term loans with a relatively short repayment period, typically between 3 to 24 months. Short-term loans are an good option for financing the acquisition of supplies, inventory, or raw materials, covering payroll, financing working capital requirements, and so on.

Short-term loans can be secured or unsecured, depending on the loan amount and the lender. In most cases, they carry higher interest rates compared to long-term loans. However, they are easier to qualify for compared to long-term loans.

Long Term Business Loans

These loans offer extended payment periods, typically from 2 years to 10 years. Some lenders will even allow you to service your long-term loan for up to 20 years.

Long-term loans are ideal for businesses looking for cash to finance massive projects, acquire capital goods and services, expand or modernise their facilities, and so on.

You can borrow higher amounts with long-term loans, but most lenders will require that you provide guarantors or collateral to secure the loan.

Generally, long-term loans are much harder to qualify for and will often be eligible to businesses that have been in operation for a long time. The upside, however, is that they usually offer lower interest rates.

2. Business Lines Of Credit

This is a dynamic type of loan that gives you access to funds on an as-needed basis up to your credit limit. You can access funds from the business line of credit multiple times, provided you don’t exceed your credit limit.

For instance, if you have a line of credit worth Ksh10 million, you can draw Ksh1 million from the facility today, another Ksh3 million next week, another Ksh5 million next month, and so on, provided the total amount drawn doesn’t exceed Ksh10 million.

If you’d already drawn the entire Ksh10 million available from the facility but then pay off Ksh5 million, you’ll have 5 million shillings that you can draw if needed.

Keep in mind, however, that business lines of credit have a predetermined draw period. For instance, if your line of credit has a draw period of 24 months, you can draw from the facility and repay owed amounts as you wish throughout this period.

Once the draw period expires, however, you won’t be able to access the funds within the facility. Instead, you’ll now enter the repayment period where you’ll be required to make monthly payments until the outstanding loan amount is cleared.

Business lines of credit offer several advantages. First, they give you control over the loan. Despite having the whole loan amount available to you, you only draw what you need, and interest is only charged on what you draw.

For instance, if you have a line of credit with a limit of Ksh10 million, but you only need Ksh1 million at the moment, you’ll only draw Ksh1 million and pay interest on the Ksh1 million.

Business lines of credit also offer great flexibility. You can draw funds from the facility, repay the amount, and then draw funds again. This gives you the flexibility to borrow and repay as you wish.

What’s more, some business lines of credit don’t require you to provide any assets as collateral. However, you’ll need to have good credit to be eligible for this facility.

On the flip side, business lines of credit usually come with additional costs, such as drawing fees and maintenance fees. In addition, lines of credit start accruing interest immediately after you withdraw funds from the facility. There’s no grace period.

Business lines of credit are an excellent way for businesses to meet their short-term financing needs, such as maintaining a healthy level of cash flow and taking care of unexpected expenses. Businesses can also use lines of credit to finance projects with undetermined costs, cover working capital, and purchase intermediate assets.

3. Equipment Loans (Asset Financing) 

Also referred to as asset financing, this type of credit is designed to help businesses acquire business assets or equipment. You can use equipment loans to purchase cars, heavy commercial vehicles, construction equipment, medical equipment, agricultural equipment, industrial machinery, IT equipment, and so on.

One of the best things about equipment loans is that you don’t need to provide your business assets as collateral. Instead, the equipment you are purchasing will act as collateral for the loan.

For instance, if you take a loan to purchase a lorry, the lorry will act as collateral. If you default on the loan, the lender can seize the lorry and sell it off to recover their money.

Another advantage of equipment loans is that you build equity in the equipment as you continue paying off the loan, which you can then use to access more credit.

Let’s say, for example, that you borrow money to purchase a lorry and pay off the loan amount within three years. After paying off the total amount, the lorry now belongs to you. You can now use it as collateral to borrow another loan.

Equipment loans also offer competitive rates, especially if your business has solid finances and good credit. However, most lenders will require you to raise a down payment for the asset you want to purchase, which can be as high as 20%.

4. Commercial Real Estate Loans

Commercial real estate loans are very similar to equipment loans, but they only provide financing for real estate. These are a suitable option for businesses that want to acquire commercial property, such as an office building, shop space, or even a manufacturing facility.

Like equipment loans, commercial real estate loans don’t require any collateral. Instead, the property you’re acquiring acts as collateral.

One advantage of commercial real estate loans over equipment loans is that real estate loans typically offer lower interest rates and longer repayment periods. For example, most lenders in Kenya offer repayment periods of up to 20 years for commercial real estate loans.

Commercial real estate loans also allow you to build equity in the underlying property as you continue paying off your loan.

The amount of money you can access through a commercial real estate loan will depend on the value of the property you want to purchase. Most lenders will finance up to 80% of the property's value.

If you are acquiring an office block worth Ksh100 million, for instance, you might get financing of up to Ksh80 million. You will then be required to provide the remaining Ksh20 million as a down payment for the property.

5. Invoice Discounting

Invoice discounting is a type of business loan that allows you to access funds quickly by borrowing against your unpaid invoices.

Let’s say, for instance, you have an invoice worth Ksh1 million, but the invoice is due in 60 days. You also have some business expenses that need to be cleared within a week, but you just don’t have the money.

In such a situation, you can approach a lender and ask for a cash advance, with the unpaid invoice as security for the loan. Lenders will give you up to 80% of the value of the invoice. Once the invoice is paid, you can then use the money to pay off the cash advance.

Invoice discounting is a great way for businesses that want money quickly to turn their unpaid invoices into cash. However, invoice discounting is, in most cases, a costly form of credit compared to other types of business loans.

6. LPO Financing

Local purchase order (LPO) financing is a short-term credit facility that provides businesses lacking working capital with the funds they need to complete their customers’ orders.

Let’s say, for example, you’ve won a tender to supply 200 computers to a company that has already issued an LPO. Unfortunately, you don’t have enough cash at hand to purchase and deliver 200 computers.

In such a situation, you can approach a lender, show them the LPO (a legally-binding document that acts as proof of the customer’s order), and ask them to advance you the money to purchase and deliver the computers. 

If the LPO checks out, the lender will give you the money required to purchase your 200 computers. Once you deliver the computers to the buyer and get paid, you then use the payment to repay the loan.

In Kenya, you can get LPO financing for as low as Ksh50,000 to millions of shillings. However, the LPO needs to be from a government institution, a listed NGO, or a reputable company. In most cases, the lender will provide 70% - 90% of the value of the items to be supplied.

The repayment period for the LPO financing usually depends on the lender and the terms of the LPO. Some lenders will also deposit the funds directly to the supplier, rather than your business account.

LPO financing is a great way for businesses with low working capital to manage cash flow while completing customer orders. It also allows businesses to grow faster, since they can now take larger orders that they would have been unable to fulfil without the LPO financing.

Another advantage of LPO financing is that, for low amounts, you don’t need to provide any collateral. However, lenders will require you to provide collateral for more significant borrowings (usually above Ksh1 million).

On the flip side, LPO financing is a costly form of credit compared to other options like term loans. In addition, getting LPO financing for the provision of services (rather than physical goods) can be very difficult.

7. Business Credit Cards

Just like you can get a personal credit card, you can get a credit card for your business. They both work the same way – the card gives you access to a revolving line of credit that you can borrow from and repay as needed up to a predetermined credit limit. The only difference is that the business credit card is only meant for business expenses, whereas you can use a personal credit card for anything.

Business credit cards are an easy way for businesses to meet their short-term needs and ongoing expenses, such as client purchases, paying for office supplies and utilities, corporate travel expenses, material purchases, and so on.

Business credit cards can either be secured or unsecured, depending on the lender and the maximum credit limit on the card.

Getting a business credit card offers several benefits. First, they are often easier to qualify for compared to other business loans, but this will ultimately depend on the lender.

Second, business credit cards provide you with instant access to financing. Once you qualify for a business credit card, you can use it to instantly access credit whenever you need it. No other credit facility provides such convenience. They are also a great way to cushion your business financially when sales are low, or accounts receivables are running behind.

Finally, some business credit cards offer rewards and incentives, such as redeemable points and cash back incentives. Note, however, that these rewards and incentives only apply to business-related expenses.

The downside to business credit cards is that they can get costly if you do not pay the full amount at the end of the billing cycle. 

Another downside is that you might be required to sign a personal-liability agreement before getting a business credit card, depending on the lender. This essentially means that you’ll personally be held liable should the business be unable to clear the credit amount.

Finally, some business credit cards come with variable interest rates. This can significantly push up the cost of credit in the event of an increase in interest rates.

Also Read: ABCs of Credit Cards: What to Know About Credit Cards in Kenya

8. Overdraft Loans

Overdraft facilities are a type of credit where a financial institution allows you to withdraw more money than is in your business account.

Let’s say, for example, you need to purchase inventory worth Ksh1 million, but you only have Ksh800,000 in your business bank account. You can still pay your supplier Ksh1 million directly from your account with a business overdraft loan facility, despite not having the full amount. In this case, the Ksh200,000 is the overdraft.

Overdraft loans operate like a type of revolving line of credit. Let’s say, for instance, you have a business overdraft loan facility with a Ksh1 million limit. This means that you can draw up to Ksh1 million when your business bank account has zero balance.

What’s more, you’re not limited to drawing from the overdraft facility once. You can access Ksh100,000 today, another Ksh250,000 tomorrow, another Ksh50,000 the day after, and so on, provided the total amount does not exceed the Ksh1 million limit.

The offered limit for your business overdraft facility depends on the financial institution, your business cash flows, your business’s credit history, as well as your relationship with the financial institution.

Overdraft loans provide a viable solution for businesses looking to cover short-term working capital needs and temporary cash flow requirements. Depending on the issuing financial institution and the overdraft limit, the overdraft can either be secured or unsecured.

Business overdrafts offer several benefits. First, they provide unlimited access to credit for the duration of the overdraft arrangement. You can access the overdraft facility as many times as you wish, provided you are within the set limits. Paying off borrowed amounts allows you to access the full overdraft amount again.

Another advantage of business overdraft loans is that interest is only charged on the borrowed amount. For instance, if you have a limit of Ksh1 million, but you only overdraw Ksh100,000, interest will be charged on the Ksh100,000, not the available Ksh1 million.

The major disadvantage of business overdraft loans is that your business needs to have an active account with the issuing financial institution. The cost of an overdraft facility can also be higher compared to other options like term loans. Finally, there is the risk of high penalties if you exceed your overdraft limit.

9. Business Cash Advances

A business cash advance is a business credit facility that allows a business to borrow against its future sales. The lender gives you a lump sum of money, and then you give them a portion of your daily or weekly sales until you clear the loan.

Business cash advance loans provide an easy and quick way for businesses to get quick cash, but the downside is that these loans have some of the highest interest rates. 

As a result, they are not very popular. Ideally, you should only opt for business cash advances if you cannot qualify for other types of business loans.

10. Loans Under Government Scheme

The Kenyan government has also initiated various loan schemes that are primarily available to business ventures run by marginalised groups, such as the youth, women, and persons with disabilities. In most situations, loans under government schemes come with additional benefits, such as training and mentorship.

Some of the government-sponsored business loan schemes that are available to Kenyans include:

  • Biashara Kenya Fund - This is a new fund that was formed after the merger of three affirmative-action funds namely
  •  Youth Enterprise Development Fund (YEDF): This fund provided loans to businesses owned by the youth and startup capital for young entrepreneurs. Through the YEDF, the youth could access between Ksh100,000 to Ksh1 million. The fund also provided coaching, training, and mentorship.
  • Uwezo Fund: This is another empowerment program that provided loans worth between Ksh50,000 to Ksh500,000 to businesses owned by the youth, women, and persons with disabilities.
  • Women Enterprise Fund: Sponsored by the Ministry of Gender, this fund provided business credit to women entrepreneurs. The fund also helps them to market their goods and services.

The Biashara Kenya fund allows a single borrower to borrow up to Ksh2.5 million. Youth- and women-owned businesses are each allocated a 35% share of the loans available through the fund while enterprises owned by persons with disabilities have a 10% share of the funds available. 

Micro-, small- and medium-sized enterprises have been allocated a maximum of 17% of the loans available. The National Treasury in 2021 retained the cost of borrowing from the Biashara Kenya Fund at 6% making it the cheapest longer-term loan facility in Kenya. 

Also Read: Cheaper Biashara Loans as Uwezo, Youth Fund Scrapped

  • Industrial and Commercial Development Corporation (ICDC): The ICDC is a parastatal that offers medium and long-term business loans to Kenyan businesses, particularly those in the ICT, agro-processing, manufacturing, financial services, infrastructure, and education sectors.
  • Kenya Industrial Estates (KIE): Sponsored by the Ministry of Industrialization, KIE offers subsidised loans worth between Ksh100,000 to Ksh500,000 to businesses in the Jua Kali sector, while SMEs can qualify for up to Ksh14 million.
  • Industrial Development Bank (IDB): IDB offers secured loans to medium and large enterprises in the industrial and manufacturing sectors.
  • Agriculture Finance Corporation (AFC): This is yet another government corporation that offers loans to entrepreneurs in the agri-business sector.


For entrepreneurs looking for business loans to boost and grow their businesses, it’s clear that you have many options to choose from. Note, however, that each of these loan types is suited for different situations.

At the end of the day, the best business loan for you will depend on several factors, including the financial needs of your business, how fast you need to access the credit, your preferred repayment period, the cost of credit, and so on. Put these into consideration, and it will become a lot easier for you to find a suitable business loan.

If going through multiple loan types to determine the best one for you sounds like a chore, you can opt to use our business loan finder tool. Simply answer a few questions about the kind of loan you’re looking for, and we’ll help you find the most suitable loans 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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