Understanding lending and advancing credit to small-scale businesses and individuals is 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 wrong and you cannot 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.
The business cash flows determine repayment ability. 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 repaying a loan, or will it crumble? Because the reality is that 3 out of 4 startups in Kenya fail within the first few years of inception.
Some of the things Banks do not do:
- Banks do not lend to security
- Banks do not lend to startups- (unless it’s a unique project- mostly co-funded by an international body aiming at reaching youth and startups)
- Banks do not lend to declining profit businesses- you have to show that the business is doing well and that the credit given will increase your bottom line.
After all that,then ensure you are not negatively listed on CRB.
You can then approach a bank for financing.
The beauty of loans, if well calculated, executed and monitored,you scale your business with someone else's money, at a cost.This way, you can scale, otherwise you remain— Wacera (@Banice___) October 27, 2019
Some of the things you need to put in place before approaching the bank for a loan:
- 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?)
- Bank all your income before you do your expenses; this will boost your account turnover averages and back up the story of your sales figures.
- Maintain positive status of loan repayments on your CRB. If you have a loan, you are listed. It is positive if you are paying well per the schedule, but it is negative if you pay late or don’t pay. CRB also awards you a score that describes your creditworthiness.
Micro Loans requirements
In a nutshell, what will the lenders look for when determining if you qualify for a loan?
- The first thing is your CRB status – always check this from time to time (we have all heard of fraudulent mobile loans, right?)
- Second is your account’s status, so if there are months that you banked little or did not a bank, can you explain? Most lenders consider your Safaricom M-pesa statement; that way, you can clarify 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.
- 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 monthly costs. This gives the net profit from the company in question. Total household expenses are also calculated.
- After this is considered, the average net income after business and household expenses is divided into two. This is the amount taken as an affordable monthly repayment.
- Lastly is the issue of security/collateral. For microloans, the security issued is household items, logbooks mostly referred to as chattels, or title deeds (for amounts above Ksh 500,000). Household items include your T.V, sofa sets, and wardrobes, among others. Business assets can also be provided as security and can either be valued by a professional valuation firm or provided receipts.
Kenyan Borrowers Could Save KSh 11,150 Annually in Bank Fees
