A business loan is an inevitability for many ventures. To either start a business or to expand operations, entrepreneurs and established enterprises might need financing.
At times the business owner might not have the capital to grow their enterprise. After one decides it is time to take a loan, now what?
Identifying the right financier and understanding the requirements will take one closer to securing finance hassle-free.
A business loan is a form of debt taken out from a financier to either start a business, meet the enterprises financial obligations or for expansion.
The enterprise is then required to pay up the loan through an agreed upon repayment schedule. As is with any form of financing, business loans are not free, lenders will charge interest and accompanying fees.
A business loan can be secured or unsecured. A secured loan is issued upon surrendering an asset or what is commonly known as collateral, such as land, a vehicle or land to the bank.
In case the borrower defaults, the bank can dispose of the collateral and recover its money. An unsecured loan on the other hand is given to the customer without any attachment to their property or assets.
Unsecured loans are often given to business owners without tangible assets. Note, however, that the bank has legal recourse in case the business defaults on an unsecured loan.
Before seeking a business loan, it is important for the borrower to do their due diligence. Not all business loans are created equal, and without taking the time to get the best deal you could find yourself paying as much as twice the interest rate charged by a different financial institution.
In addition to getting the best rates, you also want to understand the eligibility requirements. Maybe you want to wait until you have been operational for more than 6 months or one year to qualify for a better loan offering or a higher amount?
Another major consideration in addition to the above is the type of institution offering you the business loan. Here is where business loans differ in complexity to personal loans given the different niches of lending.
Some institutions target the mass market with business loans while others are focused on some niches such as one tier of MSMEs or further into a specific field such as agriculture financing.
Beyond that, there are different eligibility requirements depending on the tier of institution - For instance commercial banks, microfinance banks and microfinance institutions will have varying requirements with the microfinance space having marginally lower eligibility requirements.
The institution type becomes even more important when you consider the interest rates charged. For business loans in Kenya, the interest rates range from an average of 17% per annum for commercial banks to a high of 27% per month for some microfinance institutions.
Note that while it may be a no-brainer to choose the institution with the lowest interest rate, it might have higher eligibility requirements that may disqualify you leaving you with no option but to choose the alternatives.
That said, the interest rate alone does not constitute the total cost of borrowing the business loan - due to the array of additional fees different lenders charge (or not) - which means it is possible for a loan with a higher interest rate to be cheaper than one that has a lower interest rate if the second charges more in additional fees.
After selecting the right lender for your business, one must prepare all the necessary documentation to make the process seamless. Financiers often look at an array of business documents and records before they can offer the loan. Different types of businesses need different kinds of documentation to get a loan depending on the lender.
For sole proprietors, partnerships and limited companies one must have
Micro and small enterprises such as kibandas and mama mbogas can access business loans provided that they have a business permit.
One can access loans from different institutions to fiancé their businesses. This includes banks, microfinance banks, microfinance institutions and savings and credit co-operative societies.
Want to compare business loans in Kenya on the terms that matter most to you? Check back on Money254 this month before Christmas. We will have all the business loans in Kenya available for comparison.