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Funding mistakes I have seen SMEs make

By Caroline Okello | March 10th 2021


A man counts Kenyan Shillings, the currency of Kenya, in Nairobi, Kenya, on Thursday, Feb. 25, 2010. [Photographer: Trevor Snapp/Bloomberg]

To many young entrepreneurs, the thought of borrowing money from a bank is akin to signing up for a listing on the dreaded Credit Reference Bureau for non-payments. But it doesn’t have to be that way. With proper planning, a loan is the saviour any entrepreneur could use to grow, start a business or run one.

Elizabeth Wasunna, the current director of business banking at Absa Bank, has had over 25 years of experience in banking. She explains the most common mistakes she has seen small and medium enterprise (SMEs) owners make when borrowing money from a bank.

1.       Lack of proper planning

Planning is very critical. This sounds obvious but preparation forms 90 per cent of the problems SMEs face when borrowing. Don’t just plan based on your understanding of what is needed. You need to plan with what the bank requires in mind. Someone might come and tell me they need to borrow money to buy a piece of plot and when asked about their cash flow, they might say they did a job for the county government and they’re waiting for that money to come through. It doesn’t work like that.

What you need to do instead

Your business plan has to be solid for you to borrow from the bank. We poke holes into business plans, not because we don’t want you to do it, but because we need you to understand the risks associated with how you’re planning. Remember, the bank normally collects money from individuals in terms of deposits. People bank their life savings with us so when we’re lending out, we have to be responsible lenders. Some of the things we need you to have is insurance to be able to support you in case there’s a problem, cash flows, business continuity plan, proper registration and regulatory certificates. In the event we find that you need security, we will ask for that.

2.       Believing you must have security

A lot of the time, the facilities we have in the market are secured so you might be asked for a logbook or title and so on for security. But a lot of SMEs don’t have these. If you zero in on women, the statistics get even worse. You find that since 2013, not more that 3 per cent of title deeds issued belong to women, and yet they manage 50 to 60 percent of the agriculture space. It means that women don’t have title deeds to their names, so you’ll almost be sabotaging them as far as secured facilities are concerned. With this in mind, banks have crafted solutions that support businesses that don’t security. All you need to do is walk into a bank and ask. Some people, because of lack of knowledge, are scared to walk into bank.

3.       You don’t ask for the right thing

One problem I’ve observed is people don’t understand the language of the bank. Let’s say you want to trade with the county government and they ask you to get a bid bond. Now, instead of coming to the bank to ask for a bid bond, you ask for a loan because that is what you understand. Again, let’s say you want to buy a car. Don’t just come for a loan, come for an asset-based finance. Or say you’re looking to import goods, you need a Letter of Credit to be able to secure your goods to bring it into the country in a secure manner. A lot of people don’t understand the language of the bank, that’s why it is important to start the conversation early, before you need a facility. This prepares you so that by the time you require the facility, you know what the bank requires and there are no delays.  

4.       Borrowing at the last minute

Don’t wait until things go haywire to start talking with the bank. Let’s say you’re a supplier and are anticipating delays in payment. Instead of waiting until the delay actually happens, you can approach the bank early. In this case, a bank might provide invoice discounting for up to 50 per cent. If your payment comes on time, well and good. If delays happen, you have a backup plan. Don’t be afraid to partner with a bank. Find one where you can relate, come to Absa I would say, and test our propositions. Empower yourself with information. Sometimes banks are viewed as very scary. The aim of the bank is not to bring you down. The aim is to grow you. Sometimes when we ask for security, someone might joke and say, “You want to sell my house?” And we have to explain that if you want to go into business, we want to see that you’re committed to the business; and sometimes by giving us security, that is your commitment. Our aim is not to sabotage you. Our aim, based on our proposition— both financial and nonfinancial—is to see you grow.

5.       Not taking advantage of the nonfinancial support banks offer

Many times, customers think that funding is the only support they can get from a bank, but most of the time we need to start the conversation on a nonfinancial support basis. This includes educating them because SMEs struggle with other issues, not just lack of finances. These include lack of marketplace, lack of coaching and mentoring, and lack of networking opportunities. What they don’t know is banks can offer support with said issues. We give you information as well on how to get your business registered properly, the right resources such as staffing, how to properly organise your cash flows, how to be KRA compliant, and so on. Whereas these sound like easy things, they have been the downfall of many SMEs. The bank is the cheapest and easiest way to get information because all you need to do is come in and ask and we’ll plug you into the various forums that we have. For instance, when Covid-19 hit we offered SMEs webinars on how to take your business online, leadership during a crisis, taking care of your mental health, and recently a Live2Lead women’s conference under the theme Pivot to Thrive as a way of supporting women in business. If you take advantage of both the nonfinancial and financial support, you’re more empowered by the time you hit the ground.

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