Small business owners have increased their borrowing from digital lending platforms over the last six months to cater to the growth in expenditure among them, pushed by a sharp increase in the prices of inputs.
A recent study by digital lending platform Tala, also showed that borrowing from other social and informal channels such as friends, family, chamas and saccos, that do not require much collateral has also significantly increased.
“Over the past decade, SMEs have become significant contributors to the country’s GDP, employing millions of people. For this reason, financiers have moved to expand their lending portfolios to SMEs, in order to cater to their needs,” notes Annstella Mumbi, Director Growth at Tala.
Ms Mumbi notes that while the main reasons for taking the loans were business-related, many small business owners ended up channelling the money they got to needs such as school fees and utility bills.
“What this meant is that a lot of the loans taken by the SMEs were not productive, and business owners ended up applying for other loans even when the previous ones did not have the desired impact on their business,” notes Annstella.
The report recommends that small businesses factor loans taken into their strategic plans to adequately prepare for their effective implementation and repayment, this way, the loan does not turn into a liability to the business’s growth.
Determining the purpose of the loan, whether for buying equipment, growing your team or boosting cash flow and ensuring that the loan is used for only that purpose will also make it productive. Businesses are however advised against taking out a loan to settle the existing debt as that will only tie the business into an unhealthy debt cycle.
“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 out one,” notes Ms Mumbi.
As a small business owner, the study also states that it would 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. 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,” notes Ms Mumbi.
The study also notes that SMEs should 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 have access to 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,” notes Ms Mumbi.
Indeed, not many small business owners keep a keen eye on their cash flows, hence one in every four shut down due to a cash flow crisis brought about by un-serviced debt and mismanagement of funds among other reasons.
As a business owner, the study also recommends building a foolproof automated loan repayment system, noting that you should only borrow when you have a plan on how to pay back.