Tough times as small traders slow down on credit advances

Three in 10 enterprise owners whose business was reported shut went out for financial assistance from friends and family as they did not intend to accumulate more debt. [iStockphoto]

Lack of working capital is the main reason why small business owners are closing shop, according to a recent survey.

The Central Bank of Kenya (CBK) survey also notes that these traders are slowly becoming reluctant to sell their products on credit, a factor that could be behind the lack of working capital, hence closing shop.

The FinAccess MSE Tracker Survey, August 2023, shows that the proportion of businesses offering consumer credit declined from 68.5 per cent in October 2022 to 61.1 per cent in June 2023. An interesting finding is that more female-owned businesses offered consumer credit at 63.8 per cent compared to male-owned at 57.6 per cent as of June 2023.

“The value of outstanding consumer credit mainly ranged between Sh1,001 and Sh10,000,” the survey says.

More debt

This also explains why three in 10 enterprise owners whose business was reported shut went out for financial assistance from friends and family as they did not intend to accumulate more debt.

The FinAccess MSE Tracker Survey was conducted in June 2023 and is a follow-up of an earlier one done in October 2022 and findings published in March 2023.

The tracker collects information from Micro and Small Enterprises (MSEs) owners who depend on their entities as their main source of livelihood. The is between 2019 and 2021.

A total of 4,125 respondents participated.

A total of 1,961 respondents accepted to be interviewed by research assistants in this survey, compared with 2,394 respondents in October 2022. Of the total, 1,422 (72.6 per cent) respondents reported that their businesses were still operational, while 539 (27.4 per cent) had closed.

Lack of working capital, at 46.1 per cent, was the main reason for closure. This was followed by lack of or drop in demand (24.4 per cent) and illnesses (6.9 per cent) that incapacitated the owners to operate their shops.

Household pressures

Other reasons cited are taking over household responsibilities after a partner or a family member fell ill, went back to school or got a job, family and business partner issues, supplies being unavailable, and insecurity.

“Lack of working capital was the major challenge in both female and male-owned enterprises at 47.6 per cent and 43.1 per cent, respectively,” the survey reads.

The survey states that the proportion of businesses closing remains quite significant at almost 30 per cent, with those that were found operational having remained almost constant, with 72.6 per cent of businesses being operational in June 2023 compared to 71.6 per cent in October 2022.

“There is, therefore, a need to investigate and to address why so many businesses start, operate for a while and then close,” the survey adds.

Of those whose businesses were shut, 30 per cent reported to have sought assistance from family or friends for grants of some sort as they did not intend to pay back.   

Some 19 per cent dug into their own savings to salvage their livelihood, while 17 per cent took out loans in their chamas.

Borrow from friends

There was also 9.0 per cent who borrowed from friends, neighbours or family, many took out mobile loans, and 2.0 per cent sought government grants.

“Among the closed businesses, 51.7 per cent reported that they would re-open the same business in the next 12 months, 23.7 per cent would like to start a different business, while 24.6 per cent do not intend to re-open or start a new business in the next 12 months,” the survey says.

For closed businesses to re-open, the survey states that 32.7 per cent of respondents would need between Sh20,001 to Sh50,000, 16.1 per cent would need between Sh10,001 to Sh20,000, and 16.6 per cent would need above Sh100,000.

“Majority of female-owned businesses (32.6 per cent) and male-owned businesses (32.9 per cent) would need between Sh20,001 to Sh50,000 to reopen,” the survey says.

The closure of business is synonymous with a reduced supply of goods and services on credit by suppliers.  

Access to credit

Compared to October 2022, the survey found out that trade credit to businesses reduced by 6.1 per cent in June 2023 from 36.7 per cent.

“Results indicate that female-owned businesses attract more trade credit within the two study periods: 33.0 per cent in June 2023 and 38.4 per cent in October 2022,” the survey says.

Similarly, from the study, MSE businesses were found to have reduced credit advances to their consumers, from 68.5 per cent in October 2022 to 61.1 per cent in June 2023. This is while the outstanding credit that had been advanced had reduced to 2.7 per cent in June 2023 from 3.3 per cent in October 2022. The outstanding credit value was Sh50,000 or more.

“Likewise, the proportion of MSEs that reported to have received trade credit from their suppliers in June 2023 (30.6 per cent) was less than in October 2022 (36.7 per cent),” the survey says.

The survey notes that MSEs experience a myriad of challenges, including inconsistent cash flows arising from the high cost of doing business, which may negatively impact their profitability and market linkages, which in turn limit their ability to grow.

“To counter this, MSEs take loans to remain afloat. However, with persistent harsh economic conditions, these businesses tend to default their loans by either paying late, missing a payment or paying less amount than expected,” it states.

According to the list of challenges listed by the business owners, increased inputs (high cost of supplies) was leading, followed by customers not paying on time and increased competition.  

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