Financing small businesses in Kenya is one of the greatest challenges aspiring and practicing entrepreneurs face. Many brilliant business ideas never see the light of day because the the entrepreneur behind the idea lacks sufficient funds to take the idea to market. While the entrepreneur wallows in frustration, the would be buyers are denied the opportunity to access better and probably cheaper goods and services.

We will begin by exploring the reasons why small businesses are denied funding. Banks and other financial institutions give the following reasons for not financing small businesses.

1. Small businesses are risky
   

This is true. Statistics indicate that 80% of all start-up businesses fail within five years with majority failing in the first year. There are many reasons why small businesses fail ranging from the owners shortcomings to a shift to the business and in some cases the lack of sufficient funds. To mitigate against the high failure rate of businesses, banks and financial institutions should provide business support as part of the financing small businesses package. This way, small businesses will avoid obvious pitfalls.

2. Lack of proper planning

In the dynamic business environment we operate in, it is impossible for anyone to anticipate changes in the market especially for an aspiring small business owner. Information on market dynamics would come in handy to help the entrepreneur but in most cases the aspiring entrepreneur does not have enough finances to invest in market research which essentially is a key component in financing small businesses in Kenya and beyond. Banks and financial institutions should invest in market research and avail it to start-ups and factor the cost as part of financing to the small business.

3. Lack of a clear growth strategy

This is a matter of perception. Many entrepreneurs have big dreams and a vision that would out-live them as evidenced by great entrepreneurs such as Bill Gates, Steve Jobs and Michael Joseph, the former Safaricom CEO. While the vision may be big, all ideas start small and grow to dominate the world. In the same breath, some ideas are ahead of their time and thus the entrepreneur needs to be supported until the time is ready for his/her idea to be absorbed by the market. If financing for small businesses is provided at the initial stages and sustained over time, many would survive and grow to become big and reputable businesses.

Owing to the reasons given above and others, financing small businesses remains a great challenge. However, we believe it is achievable if banks and financial institutions are willing to put in place measures to make it happen. The conditions necessary for financing small businesses include:

i) Competent and committed credit officers

Micro and small enterprise credit is considered an entry level job in banking. As such, most of the officers are either incompetent or lack commitment and patience to deal with small business owners. Their requests are thus handled in a hurried and cursory manner because the officers do it out of duty and in some cases in unethical manner. Faced with such challenges, business owners opt to look for alternative ways to fund their businesses.

ii) Information Gap

Financial and credit information is provided to small business owners on “need-to” basis. As a result, most business owners are never clear of what the requirements for financing small businesses are because in reality, they change from one provider to the next. Further, changes in credit terms and interest rates are not communicated in time which adds to the confusion for the business owners. There is a need for the government to collaborate with financial institutions to provide financial and credit information to small business owners to make credit more accessible to small businesses.

iii) Relevant credit products

All banks and financial institutions have products that purport to provide small business financing but many fail to meet their own targets to provide funding to mall businesses because their products and services do not match the needs of the target group. Most of them fail because they are designed to secure the objectives of the lending institution with little or no consideration of what the borrower needs. In some cases the threshold is so high that even the willing business owners cannot meet them and thus walk away in dejection.

iv) Flexible collateral terms

Rigid collateral terms has been the greatest hindrance to financing small businesses in Kenya. Lenders have stuck to the traditional collateral arrangements which lock out many small business owners due to the high poverty levels and dysfunctional government systems that fail to deliver instruments that would collateralize what small business owners have. Similarly, business owners in the services and creative industries sector whose products are intangible are automatically shut out of borrowing because they lack physical assets as required by the lenders.

If you need financing for a small business, consider the following factors before you start the borrowing process.

a) Does the institution have competent and committed officers? You can gauge this from your personal interaction, staff attitude and speed in attending to your queries on phone, email or in person when you visit the lender.

b) Does the institution provide information that you can use to make your borrowing decisions? Check out the lender’s public information on their website or printed material. If you are left with more questions than answers, it is a sign that there is a big information gap. Institutions that are Tech Savvy, with an updated website,active social media accounts (Facebook, Twitter, Instagram etc.) and have mobile apps are likely to be responsive and thus more suitable for financing small businesses.

c) Do they already have product(s) to meet your immediate needs? If not, convincing them will likely be an uphill task. Move on to the next small business finance provider.

d) What collateral do they need? Bring up the issue of collateral as early as possible in the discussion since this is the most obvious deal breaker for financial institutions in financing small businesses.

As Bizna, we are committed to equipping business owners with information and resources that will help your business grow and create wealth. We are negotiating with various financial services providers to address some of the immediate challenges and improve access to finance procedures to benefit our readers and small business owners.

Keep it here to participate in the discussion and benefit from on-going efforts.