How small businesses can utilise credit to thrive

One third of SMEs in Kenya collapse before their third anniversary and 80 per cent of those that survive do not make it beyond year five. In the face of rising inflation and cost of inventory, small businesses will have to implement further strategies to ensure that they thrive even as the global economy crunches.

Paramount to the survival for both small and large businesses today is maintaining a steady cash flow and accessing working capital. Contrary to popular belief, credit, when used wisely, can be a valuable tool to weather the storm and emerge stronger.

Building and maintaining a good credit history is the foundation for obtaining credit during challenging economic conditions. Lenders are more likely to extend credit to businesses with a proven track record of financial responsibility. SMEs should ensure timely payment of existing debts and be diligent in managing their financial obligations.

Last month, the Central Bank of Kenya raised the base lending rate to 10 per cent, paving way for expensive loans and tightening the lending criteria. Business owners in need of working capital should explore multiple sources of credit, including digital credit providers which can provide them with greater options and flexibility in securing funds.

During challenging times, lenders seek reassurance that borrowers have a clear sustainability and revenue generation strategy. A well-crafted business plan that highlights the steps taken to navigate through tough economic conditions can increase the credibility of the small business and make it more appealing to lenders.

Credit should be invested in activities that will drive growth and profitability. Instead of using credit to cover day-to-day expenses or short-term gaps, consider leveraging it for growth opportunities like expansion, technology upgrades, marketing campaigns, or employee training.

During economic downturns, lenders may be more open to negotiating terms to accommodate small businesses' challenges. Business owners should explore the possibility of lower interest rates, extended repayment periods, or more flexible payment schedules. Effective negotiation can ease the burden of credit repayment.

Small businesses must rigorously monitor their cash flow, cut unnecessary expenses, and find ways to optimise operations. Proper cash flow management ensures that credit is utilised efficiently and helps avoid unnecessary debt accumulation.

Maintaining a positive relationship with lenders is essential. Regularly updating lenders on the business's performance, demonstrating transparency, and promptly addressing any issues can help build trust.

The writer is the acting growth manager, Tala