Why readiness to receive funding is the biggest hurdle for SMEs

John Mungai, co-founder and and chief executive officer of Centafrique Ltd, during a breakfast meeting in Nairobi. [James Wanzala, Standard]

You might have heard or read the cliché that access to funding is the biggest challenge to small and medium enterprises (SMEs) in Kenya.

According to a report by the Central Bank of Kenya (CBK), only about 20 per cent of small businesses in the country have access to formal credit.

Well, that might not be true, according to John Mungai, co-founder and chief executive of Centafrique Ltd. He says the readiness to get that funding is the reason many are not accessing it.

"I think one of the key challenges in the Kenyan SME ecosystem  is not the lack of availability of finance; it is there. The issue is lack of readiness on the demand side to get funding," said Mungai.

"By readiness, I mean they don't understand what the banks are looking for, what they should have in place before they go to seek finance and what finance fits their need."

Mungai spoke last Friday during a breakfast meeting at Panari Hotel, Nairobi, which sought to bridge the gap between SMEs under the theme Access To Financing- Moving From Discussions To Actions.

It brought together about 20 SMEs, investors, entrepreneurs, financial institutions, development finance institutions and other key players in the entrepreneurship ecosystem.

Panellists at a breakfast meeting that sought to bridge the gap between SMEs and financiers in Nairobi. [James Wanzala, Standard]

On the lack of understanding of what banks are looking for first, he cited issues such as proper bookkeeping, audited accounts, and a positive history with financiers, which require them to document properly and have in place.

And on understanding what fits their needs, he said there is a need to understand what types of funding are available in the market at what stage, because not all financiers want debt, including equity, debt, grants or a combination of such.

To understand what banks are looking for, he said, SMEs need to have access to the market.

"This is because no bank will fund you if you can't show them that there will be a market in future so that you can be able to repay the borrowed money," said Mungai, who worked in one of the local financial institutions before quitting to establish Centafrique Ltd after seeing the challenges customers were going through.

He said that over the last three years, they have worked with over 3,000 entrepreneurs, some referred by organisations such as The Nature Conservancy, IGRA and the International Fund for Agricultural Development (IFAD), who have contracted them through various segments to nurture them into becoming investor- or finance-ready. They also get others at breakfast events after they come to them once they know what Centafrique does.

Mungai challenged financial institutions to upskill their staff to understand SMEs and the ecosystem, because it's not just about the numbers but what is behind them.

Pauline Otila, managing director of Apiculture Venture Limited, which works with small-scale beekeeping farmers, urged SMEs to seek affordable, accessible and flexible financing.

"For my business, for instance, beekeeping is seasonal, and therefore you have to find a financier who understands how your business operates so that you can plan to take it to the next level," said Otila.

She added: "Also, work with proper partners like Centafrique because if you don't know how to use the money when you get it, it will be a big problem, and such partners will advise you whether this money is for buying equipment, working capital or expansion.

Ms also challenged SMEs to be open and flexible, continuing their education, for instance in bookkeeping, reinvestment, among others, by attending such breakfast events."

For Margaret Komen, founder and CEO of Mace Foods Ltd, a social agribusiness firm headquartered in Eldoret and engaged in chilli manufacturing, she advises SMEs to have or find the right product.

"Define your product so that it can even go international. Don't just think of a business that has local consumers, but also global. Once you have such a business, you go to compliance through record-keeping. With technology platforms like Artificial Intelligence (AI), there are now free online courses to learn how to do that," said Komen.

"Be careful when looking for financial partners who will come to work with or partner with you. This is because there are financiers (venture capitalists) out there who may be intent on taking your business. After all, they see it's a good idea. You will meet a lot of people out there with money, but not all of them have good intentions."

She also emphasised the need to attend networking events to learn from each other.

"As you see me here, I have flown from Eldoret at my own expense just to attend this event, and you just don't know whom I will meet today, the fruitful connections I will make, or the publicity I will get from the media thanks to this event," she said.