How SMEs can build resilience into their credit models for business success

Over the past decade SMEs have been recognized as the future engines of growth. These businesses have contributed significantly to Kenya’s GDP by employing millions of people and empowering many others.

Financial institutions in both the public and private sectors have moved to expand their lending portfolios to SMEs to ensure that these businesses are adequately catered for.

For instance, recently, President William Ruto promised that his government will actualise a Sh50 billion Hustler Fund to facilitate the provision of affordable credit to SMEs.

The lending gap to SMEs is still wide, but many of these businesses are today enjoying access to credit at more favourable rates than ever before.

Tala’s 2022 Money March survey report reveals that 78 percent of customers are able to access credit digitally, thus enabling them to pay for business expenses and add stock on time.

Meanwhile, the Central Bank of Kenya 2021 MSME Finance Assessment Survey report, reveals that as a result of better access to credit, active MSME loan accounts grew at an annual average of between 12 and 16 percent between 2017 and 2020, to be valued at Sh638.3 billion at the end of 2020.

Funding pool

While the increased funding pool is good for the growth of small businesses, these businesses have not been able to benefit from the loans they receive.

So how then can SMEs be able to make the loans they receive work for them? One of the ways to achieve this is by constantly reviewing their business strategy.

Everything about a successfully run business emanates from a sound and effective strategy. Some MSME owners do not pay requisite attention to their monthly or quarterly progression in order to effectively review their strategy as all their focus is drawn to making sales.

If you intend to acquire any loans, let it factor into your strategic plan, so that you can adequately prepare for its effective implementation and repayment. This way, the loan does not turn into a liability to the growth of the business.

Another way to ensure that your loan is put into good use is to outline the purpose of credit in your business. Loans are an additional cost to your business that must be repaid and with interest. Therefore, just because your business is eligible for a loan does not mean you have to take one.

For business growth, precisely determine the purpose of the loan whether for purchasing equipment, growing your team or boosting cash flow and ensure that the loan is used for only that purpose. Avoid taking out a loan to settle existing debt as that will only tie the business in an unhealthy debt cycle.

As a small business owner, it would also be prudent to determine your business margins across the period you wish to seek credit for, so that if your margins are thin, you do not over-borrow and if your margins are wide, you do not under-borrow.

Most importantly, for business resilience amid growing inflation, MSMEs should not increase their debt ceilings without justifiable cause just because they are currently profitable.

As a business owner, it is also important to build a foolproof automated loan repayment system. One of Tala’s biggest financial literacy sound bites during our annual Money March period is ‘only borrow when you have a plan on how to pay back’.

Cash flow crisis

Not many small business owners keep a keen eye on their cash flows, hence one in every four shut down due to cash flow crisis brought about by unserviced debt and mismanagement of funds among other reasons.

SMEs should also keep their financial documents and data up to date. Digital credit providers, and now banks, are increasingly determining MSMEs credit worthiness using risk-based lending mechanisms.

For your business to access a sustainable line of credit with favourable interest rates and repayment periods, pay attention to your credit scores and mobile money statements throughout the year.

Building resilience into your business’s credit model is important for creating a stable financial future in which your company is less likely to fail at the first sight of an unprecedented economic event.

Ms Mumbi is the Director Growth at Tala