Micro-Loans: The Basics Before Approaching Financial Institutions for a Loan

The new Creditinfo scorecard is aimed at helping financial institutions improve their credit assessment and facilitate financing to the small business market.

Understanding lending and how advancing credit to small scale businesses and individual’s works are part of financial literacy that translates to increased financial inclusion. There is the perception that if you have a title deed for your piece of land, and hold a bank account, you can get access to a loan. 

The reality is that you cannot, this is a poor lending model. This is because banks do not lend to security. Your title deed is a fallback, just in case things go terribly wrong and you are not able to pay your loan as scheduled.  The bank is not in the business of selling assets and so the answer will always be – no, you need a business that has been operational for at least one year. 

Repayment ability is determined by the business cash flows. There is a requirement that the business has been in place for more than one year. This helps inform the decision on how it can weather the low and the high seasons. 

Will the owner manage the low seasons while also repaying a loan or will it crumble? Because the reality is 3 out of 4 startups in Kenya fail within the first few years of inception.

Some of the things Banks do not do:

  1. Banks do not lend to security
  2. Banks do not lend to startups- (unless it’s a special project- mostly co-funded by an international body aiming at reaching youth and startups)
  3. Banks do not lend to declining profit businesses- you have to show that the business is doing well and that the credit given will go towards increasing your bottom line

Some of the things you need to put in place before approaching the bank for a loan:

  1. Maintain stable/increasing profits, which can be supported by the business volumes (your business has sales worth Ksh 500,000 yet the account has monthly averages of Ksh 3Million, and you cannot explain the amount above the Ksh 500,000, so what are you doing? Laundering money?)
  2. Bank all your income before you do your expenses, this will boost your account turnovers averages as well as back up the story of your sales figures
  3. Maintain positive status of loan repayments on your CRB- (listing on CRB is both positive and negative, if you have a loan, you are listed- if you are paying well as per the schedules, it is positive, but if you pay late or don’t pay, then it is negative. CRB also awards you a score that describes your creditworthiness, find out what your score is). Visit Transunion.

Micro Loans requirements

In a nutshell, what will the lenders look for when determining if you qualify for a loan? 

  1. The first thing is your CRB status – always check this from time to time (we have all heard of mobile loans that are fraudulent right?)
  2. Second, the status of your account, so if there are months that you banked little or did not bank, can you explain? Most lenders do consider your Safaricom  M-pesa statement, that way, you can explain if money was being sent to your Mpesa. Cash-based transacting is the only mode of operation that is hard to prove and therefore,  not used in determining if you qualify for a loan. 
  3. Business activity is analyzed next. This includes the rough estimates (for the small businesses with little or no record keeping) of the total sales in a month, less the total costs in the month. This gives the net profit from the business in question. Total household expenses are also calculated.
  4. After this is considered, the average net income after business expenses and household expenses is divided into two. This is the amount taken as an affordable monthly repayment.
  5. Lastly is the issue of security/collateral. For microloans, the security issued is household items, logbook mostly referred to as chattels, or title deed (for amounts above Ksh 500,000). Household items include your T.V, sofa sets, wardrobes, among others. Business assets can also be provided as security and they can either be valued by a professional valuation firm, or receipts provided. 

For any financial insights on the above, don’t hesitate to reach out to me, I am a financial inclusion enthusiast and would love to hear your challenges, solutions, suggestions and any help you may need navigating the world of loans.