Business Loans In Kenya: What You Need to Know

A business loan is an inevitability for many ventures. To either start a business or to expand operations, entrepreneurs and established enterprises might need financing. 

At times the business owner might not have the capital to grow their enterprise. After one decides it is time to take a loan, now what? 

Identifying the right financier and understanding the requirements will take one closer to securing finance hassle-free.

‍What is a business loan?

A business loan is a form of debt taken out from a financier to either start a business, meet the enterprises financial obligations or for expansion. 

The enterprise is then required to pay up the loan through an agreed upon repayment schedule. As is with any form of financing, business loans are not free, lenders will charge interest and accompanying fees. 

A business loan can be secured or unsecured. A secured loan is issued upon surrendering an asset or what is commonly known as collateral, such as land, a vehicle or land to the bank. 

In case the borrower defaults, the bank can dispose of the collateral and recover its money. An unsecured loan on the other hand is given to the customer without any attachment to their property or assets. 

Unsecured loans are often given to business owners without tangible assets. Note, however, that the bank has legal recourse in case the business defaults on an unsecured loan.

Looking for the right financing

Before seeking a business loan, it is important for the borrower to do their due diligence. Not all business loans are created equal, and without taking the time to get the best deal you could find yourself paying as much as twice the interest rate charged by a different financial institution. 

In addition to getting the best rates, you also want to understand the eligibility requirements. Maybe you want to wait until you have been operational for more than 6 months or one year to qualify for a better loan offering or a higher amount?

Another major consideration in addition to the above is the type of institution offering you the business loan. Here is where business loans differ in complexity to personal loans given the different niches of lending. 

Some institutions target the mass market with business loans while others are focused on some niches such as one tier of MSMEs or further into a specific field such as agriculture financing. 

Beyond that, there are different eligibility requirements depending on the tier of institution - For instance commercial banks, microfinance banks and microfinance institutions will have varying requirements with the microfinance space having marginally lower eligibility requirements. 

The institution type becomes even more important when you consider the interest rates charged. For business loans in Kenya, the interest rates range from an average of 17% per annum for commercial banks to a high of 27% per month for some microfinance institutions. 

Note that while it may be a no-brainer to choose the institution with the lowest interest rate, it might have higher eligibility requirements that may disqualify you leaving you with no option but to choose the alternatives. 

That said, the interest rate alone does not constitute the total cost of borrowing the business loan - due to the array of additional fees different lenders charge (or not) - which means it is possible for a loan with a higher interest rate to be cheaper than one that has a lower interest rate if the second charges more in additional fees. 

Preparation needed before applying for a loan

After selecting the right lender for your business, one must prepare all the necessary documentation to make the process seamless. Financiers often look at an array of business documents and records before they can offer the loan. Different types of businesses need different kinds of documentation to get a loan depending on the lender.

General Application Documents

For sole proprietors, partnerships and limited companies one must have 

• National identification of owner(s) or directors
• Passport size photograph for owner(s) or directors
• Kenya Revenue Authority PIN for owner(s) or directors and,
• Certified bank statements for at least six months.

Additional requirements for sole proprietorships and partnerships

• Certificate of registration for the business
• Residential Address confirmation for all signatories if a partnership
• The businesses or partnerships physical address confirmation
• Business records
• Business license

Additional documents for Limited Companies: 

• Company certificate of compliance if not locally incorporated
• Memorandum of Association and Articles of Association
• Companies PIN Certificate
• Resolution to borrow for companies
  Sketch map area of residence and business premises

Micro and small enterprises such as kibandas and mama mbogas can access business loans provided that they have a business permit.

Who qualifies for a business loan

• Type of business: Different business types have to fulfil different conditions to qualify for a loan in Kenya. The registration statuses might determine what kind of loan a business can qualify for. 
• Operation timelines: Lenders often consider how long a business has been in operation before issuing a loan. Most lenders require that a business must have been operational for a minimum period of six months to qualify for a loan. 
• History with the lender: Some lenders require that the business or the owner have a six months’ history of banking or saving with them. 
• Savings: Some financiers will require a business to have saved with them for a given period of time or a certain percentage of the amount one intends to borrow, which ranges from 10% to 30% before they can qualify for a business loan. 6
  

Charges attached to business loans

1. Interest rate: This is the amount the financier will charge the business as a percentage of the principal, that is, the amount borrowed. Interest rate can be charged on flat rate or using a reducing balance. A flat rate regime maintains a constant interest rate throughout the loan period while a reducing balance is an interest rate that is calculated every month on the outstanding loan amount.
2. Application fees: This is a non-refundable amount paid to the lender for submitting a loan application. Some lenders charge loan application fees while others do not.
3. Processing fee: This fee, which is a one-time charge, caters for administrative costs and ranges from 2.5 per cent to 7.5 per cent depending on the lender.
4. Excise duty: Lenders in Kenya charge excise duty, which is 20 per cent of the processing fee, from the amount borrowed before disbursement.
5. Credit insurance fee: This fee, which typically is less than one per cent of the amount borrowed, is meant to pay off the loan in the event of death of the business owner.
6. Late fees: This fee is charged when the borrower defaults on a payment.
7. Other fees: There are other charges that a bank may attach to a business loan including commitment, securitization and chattel fees.

Organizations that offer business loans

One can access loans from different institutions to fiancé their businesses. This includes banks, microfinance banks, microfinance institutions and savings and credit co-operative societies.

Advantages of business loans

• One can borrow a significant amount of money for an asset or project that they could have otherwise not afforded.
• Unlike equity financing, where an investor injects funds into your business, lenders have no control over how one runs the business and does not own any part of the enterprise.
• Interest paid on a loan is tax deductible as a business expense, thereby reducing the amount of income tax paid.

Disadvantages of business loans

• Monthly debt payments have to be paid regardless of whether the business made a return or not.
• Defaults in payment attract late fees.
• Loans to small businesses can be constrained or become expensive in times of financial uncertainties.
• In the case of a secured loan, failure to pay means loss of the asset attached

Want to compare business loans in Kenya on the terms that matter most to you? Check back on Money254 this month before Christmas. We will have all the business loans in Kenya available for comparison.