Running a small business in Kenya is exciting, but there are times when you’ll need extra money to help it grow.
This is where responsible debt financing comes in.
Debt financing means borrowing money to fund your business, and when used responsibly, it can make a big difference in helping your business succeed.
However, borrowing money comes with its risks. If you don’t manage it well, it can put a strain on your business.
Let’s break down what responsible debt financing is and how you can use it to grow your small business without the stress.
What is debt financing?
Debt financing is a way for your business to get money by taking out loans or credit. You borrow money and agree to pay it back, usually with interest. In Kenya, small businesses often use these three types of lenders:
- Commercial Banks: Banks like Equity Bank and KCB provide different types of loans, such as business loans and overdrafts.
- Microfinance Institutions: These are smaller institutions that offer easier-to-get loans for businesses. A few examples are Faulu Microfinance and Kenya Women Microfinance Bank (KWFT).
- SACCOs (Savings and Credit Cooperative Societies): SACCOs are member-based organizations where you can borrow money based on how much you’ve saved with them.
These are the main places to turn to for debt financing, but it’s important to know how much you need and how you’ll pay it back.
Why responsible debt financing is key for your business
Taking on debt is about growing your business in a healthy way. Here’s why borrowing responsibly matters:
- Business growth: The right loan can give you enough money to hire more staff, buy equipment, or expand your business.
- Cash flow management: Sometimes, your business might have periods where money coming in is slower than usual. Debt financing helps to balance your cash flow so you can pay bills and salaries even when sales are slow.
- Credit score building: If you repay your loans on time, you build a strong credit history. This makes it easier to borrow again in the future.
Being smart about how much you borrow and when you repay is key to making debt work for you.
Tips for borrowing responsibly
When borrowing, you want to make sure it’s going to help—not hurt—your business. Here’s what you should do:
1) Borrow only what you need
It’s tempting to take out a large loan, but always borrow only the amount your business needs and can afford to repay comfortably. Too much debt can lead to financial trouble.
2) Understand loan terms
Different loans come with different rules. Look closely at interest rates, repayment periods, and any hidden fees. You want to choose a loan that fits your needs.
For example, if you’re buying equipment, asset financing might be your best option. But if you need cash for daily operations, a short-term loan is better.
3) Keep detailed records
Always track your expenses and repayments. Good record-keeping helps you stay on top of things and ensures you don’t miss any payments.
4) Monitor your debt levels
It’s easy to get carried away with borrowing, but too much debt can harm your business. Keep an eye on your debt-to-income ratioThe debt-to-income ratio (DTI) is a financial metric that helps assess a person's ability to manage their debt relative to their income. It's calculat... — this is the percentage of your business’s income that goes towards paying off debt.
A lower ratio is always better.
Government programs and support
If you’re worried about borrowing from commercial banks, there are also government programs and development initiatives in Kenya designed to help small businesses:
- Youth Enterprise Development Fund (YEDF): If you’re a young entrepreneur, this fund offers loans tailored to youth-led businesses.
- Women Enterprise Fund (WEF): This fund provides loans specifically for women in business.
- Credit Guarantee Scheme (CGS): The government guarantees part of your loan, making banks more willing to lend to small businesses that might not qualify otherwise.
These programs can be lifesavers for businesses struggling to access traditional loans.
Final thoughts
Debt financing can be a game-changer for your business if handled wisely. You get the capital you need to grow while building a solid financial foundation for future borrowing.
Always borrow responsibly, keep a close eye on your debt, and choose the loan that fits your business’s needs. When you do this, debt financing can be a powerful tool to help your business thrive in Kenya.