If you are currently running a business in Nairobi with monthly sales from Ksh100,000 upwards, you may already be thinking about how much more profit you could be making if you had a little more capital.
If this is you, then the unsecured working capital loan category has got to be an attractive option for you.
A working capital loan is a type of short-term business financing that is specifically meant to cover operating expenses - day-to-day activities that contribute to the businesses’ revenue generation.
Some of the expenses that a working capital loan can be used to finance include paying employee salaries, covering daily operation costs, paying rent and the purchase of stock among others.
You cannot use a working capital loan to pay for long-term expenses, purchase long-term assets or make long-term investments outside of the business’ daily operations.
Here’s an example of one way a working capital loan can benefit your business.
Let’s say you own a vehicle spare parts shop and a significant chunk of your clients are institutions that pay your invoices in tranches of between 21 and 90 days.
If in the month of July, you made sales of Ksh150,000 to such credit buyers but in early August you get the need to quickly restock to fulfil a Ksh100,000 order from another client and you do not have the cash in in hand, you can take a short-term working capital loan of Ksh100,000, fulfil that order and book your Ksh30,000 profit - then pay back this loan immediately your institutional clients pay that invoice.
In this case, the short-term working capital loan has allowed you to take advantage of this new sales opportunity without needing to raid your personal finances or forcing your clients to pay earlier than agreed.
You are able to make a profit by utilising ‘other people's money’ and if you qualify for a revolving working capital loan, you get to do this instantly whenever you need a cash injection without needing to submit fresh loan applications each time.
Now, working capital loans can be both secured with for example real estate, machinery and equipment, or inventory and unsecured, such as the Shara Revolving Capital Loan. In this article, we are going to focus on unsecured working capital.
As the name suggests, to get an unsecured working capital loan, you are not required to provide collateral or guarantors. Instead, the lender assesses your business transaction history and your ability to repay to determine your eligibility.
From time to time, many businesses may not always have adequate cash in hand or easily liquidable assets to cover operational costs and may need to get a loan for this reason.
It is especially true for businesses with highly seasonal sales cycles, for example businesses supporting schooling such as bookshop and uniform shops or businesses in the hospitality industry - that may have to rely on working capital injections during low seasons. It is also true for any startup business that may not have enough capital to fulfil all the orders that they may be getting.
While the need for working capital injections is clear for many business types, being asked to provide collateral such as a vehicle logbook or title deed for a 2-month loan for example, may not be the most exciting thing for a business that needs to fund just one or two sizable transactions that are going to pay back in less than two months.
That explains the popularity of unsecured working capital loans among small businesses and below we are going to discuss some of the benefits.
Many small and growing businesses depend almost entirely on the sales they make to build their working capital that supports transactions.
But, often, sales may not be as consistent or payment cycles from credit buyers may come in the way of initiating new profit-making transactions.
Getting unsecured working capital can keep the business afloat whenever these revenue gaps occur allowing the business to continue growing without needing to part with equity or unnecessarily putting business and personal assets at risk.
With access to unsecured working capital, many businesses have the opportunity to grow by taking advantage of money-making opportunities without needing to provide collateral. In the event of default, no business or personal assets will need to be forfeited.
Unsecured working capital loans can be structured in such a way that you can borrow instantly whenever you need - from an assigned loan limit - eliminating the need to keep making applications whenever you are in need. This can be quite advantageous especially for businesses where speed is critical to profitability.
Flexibility is also offered in terms of loan tenures such that a borrower can choose a repayment period that best matches their business’ needs.
One such product that allows a business owner to borrow multiple times against a set credit limit in the Kenyan market is the Shara Revolving Capital Loan. We discuss this loan option in detail in the next section.
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The Shara Revolving Capital Loan is a unique unsecured working capital loan offered by Shara Technologies Ltd, a Microfinance Institution (MFI) licensed under the Central Bank (Amendment) Act of 2021 and regulated by the Central Bank of Kenya.
As mentioned above, the revolving unsecured working capital loan means that once your business qualifies for this product, you will be given a credit limit, say Ksh100,000, from which you can borrow multiple times as long as the total of the amounts you borrow do not exceed the limit.
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That means, you can borrow just what you need several times in a month and each loan will have its own due date - making the Shara Revolving Capital Loan a worthy consideration for small and growing businesses that may be depending on expensive digital loans or other ad hoc loan sources such as friends and family that may not always be reliable or timely.
1. Shara Loan Limits: A business can borrow from as low as Ksh20,000 to a maximum loan limit of Ksh200,000. Note that the starting limit will be equivalent to 20% of the business’ monthly sales subject to a minimum of Ksh20,000 meaning your business has to demonstrate it makes sales of at least Ksh100,000 every month to qualify for the Shara Revolving Capital Loan.
Note that you can borrow any amount e.g. Ksh1,000, as needed once your loan limit has been set. You can then borrow only up to the limit.
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2. Shara Loan Duration: The unsecured revolving working capital loan is offered for tenures of 2 weeks, 4 weeks and 8 weeks depending on the customer’s preference.
3. Shara Loan Interest Rate: The Shara unsecured revolving working capital loan charges interest based on the loan duration. If you take a 2-week loan, the interest rate rate is 5%, for a 4-week loan duration, the interest rate is 7% and for those who want to take the loan for 8 weeks, the applicable interest rate is 14%.
4. Other Fees: There are no additional fees that are charged on the Shara unsecured revolving capital loan. There is no loan processing fee, only the interest as outlined above.
5. Shara Loan Structure: The Shara unsecured revolving capital loan is unsecured, meaning no collateral is needed to qualify. The interest is charged at a flat rate structure.
6. Repayment Frequency: All Shara unsecured working capital loans, regardless of duration, have a weekly repayment schedule where each week you pay back an equal proportion of the amounts due plus interest.
The Shara unsecured revolving working capital loan is meant for business owners of registered businesses that are looking for regular working capital injections into their enterprises. Below, we discuss the eligibility requirements.
1. Business Type: The Shara Revolving Capital Loan is only advanced to formally registered businesses. In addition to providing business records that show your revenue history, you will be required to provide a copy of your business permit as part of the loan evaluation process.
2. Time in Business: To qualify for the unsecured Shara revolving working capital loan, your registered business needs to have been in business for a minimum period of 6 months. You will be required to provide M-Pesa and bank statements for at least the last six months.
3. Minimum Monthly Sales: Your business needs to be generating a minimum of Ksh100,000 every month in sales to qualify for the Shara unsecured revolving working capital loan. Note that this is direct revenue (total sales) and not necessarily profit.
4. CRB Status: To qualify for this unsecured loan from Shara, you will need to be in good standing in the CRB. This means that you need to either be actively servicing any existing loans you have or do not have outstanding loans that are in default - i.e. you have loans that you are not currently repaying.
5. Location: Currently (as of August 2023), the Shara unsecured revolving working capital loan is only available to business people whose businesses are located in the Nairobi Metropolitan Area.
Consequently, individuals who do not meet the eligibility criteria outlined above will not qualify for a Shara Unsecured Revolving Working Capital Loan. These include
If you qualify for a Shara Unsecured Revolving Working Capital Loan, the first step will be a determination of the maximum loan limit you can get. This is determined by your businesses’ verified monthly sales value.
As long as you make a minimum of Ksh100,000 in sales, every month, you can qualify. Shara will give you a maximum of 20% of your monthly sales value as a loan limit where you can borrow just what you need.
For example, if your casual shoe business makes sales of Ksh350,000 on average every month, you can qualify up to a maximum of Ksh70,000 as your upper credit limit.
But you don’t have to borrow that Ksh70,000 all at once. Instead, you can draw down your limit as needed without needing to pay before taking another loan.
For example, if in the first week of August you needed Ksh15,000 to fulfil a wholesale order, you can borrow that on say August 5, and complete that transaction.
Let’s say you took this Ksh15,000 for a period of 4 weeks (7% interest) but on August 10, you urgently needed Ksh35,000 to sort out another business need.
With the Shara Unsecured Revolving Working Capital Loan, you can instantly borrow this amount (Ksh35k) without needing to pay back your first Ksh15k loan - the first weekly instalment for the 15k is not due until after 7 days (August 12).
And even after this, if you needed another Ksh5,000 loan say on August 20, you can still instantly access that money since you still have Ksh20,000 left on your Ksh70,000 loan limit.
At this point, you will have made two weekly instalments on the first Ksh15k loan and one instalment on the second Ksh35,000 loan.
The good thing about this loan is that as you pay back the loan, your loan limit replenishes.
If, for example, by the time you are taking the Ksh5,000 loan on August 20, you had already repaid Ksh20,000 of your first two loans, then you would already have replenished your loan limit by Ksh20,000.
That is, on August 20, your available loan limit, after making three instalments on existing loans, would be Ksh40,000 (Ksh75k - (Ksh15k+35k) + Ksh20k). In sum, your limit replenishes upon repayment and is immediately available for borrowing.
You pay interest only on what you borrow. Even if you have been approved for a Ksh100,000 loan limit and your needs are typically Ksh20,000 to Ksh30,000 monthly, you will only need to pay interest on the Ksh20k or Ksh30k only when you borrow it and for the period you borrow it for.
If in the next months of September and October you are not in need of a working capital injection, for example, and so you don’t borrow anything from your limit, you do not pay any interest or fee at all.
Note: There is no limit to the amount you can draw down from your limit. If all you need is Ksh1,000, you can just borrow that even if your limit is Ksh60,000.
Now that you know what a revolving unsecured working capital loan entails and explored the Shara Revolving Capital Loan, here are some ways to use this option to grow your business.
If you are looking for other options in the market that can serve the same purpose as the unsecured working capital loan, you can explore logbook loans offered by microfinance institutions or if you are specifically operating an agribusiness, you can consider the Avenews that offers loans of up to Ksh10 million to agribusiness owners for a maximum period of six weeks.