In Kenya, more than 70 per cent of small and medium enterprises lack access to medium and long-term financing. The situation has been made worse by the ongoing pandemic where lenders engaged low gear as far as lending for businesses is concerned. Is it a good idea then, to take a loan during a crisis?
According to players in the banking sector, there are benefits and challenges associated with taking a loan to start or expand a business in times of crisis.
One long time banker, Charles Muema says the challenges depend on the line of business one is in or intending to get into. He says some businesses have been adversely affected by the crisis while others have proved resilient.
In any case, he says, it is the cash flow that determines if an existing business can take on more credit. While the banks may not necessarily require extra level of security during this time, they are however cautious on which industry to lend to. By their nature, mobile and short-term loans have been more popular during this time.
What then would be the benefits of taking a business loan during this time?
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“One has a chance to negotiate better terms since lenders are flexible and sensitive to the needs of customers. Those who have already taken a business loan have the advantage of renegotiating flexible terms with banks,” says a local bank manager.
But there are challenges too to taking on a business loan at this time. The possibility that some of such loans will join the non performing debts category is very high. Reasons? personal business loans, say financial experts, are dependent on either proof of income or employment, the very things largely affected by the pandemic.
The situation is particularly difficult for some sectors such as tourism that have been adversely affected by the health crisis.
“Banks have put in place more stringent conditions for new lending while some banks may shy away from lending to some sectors of the economy especially those adversely impacted by the pandemic,” says the manager.
The recent lifting of grace period on loan defaulters’ listing by the credit reference bureaus has removed the cushion borrowers had against coronavirus. The six-month suspension, sanctioned by the Central Bank of Kenya ended on September 30, 2020, following which existing procedures for risk classification of loans with respect to their performance and subsequent listing with CRBs would apply. Borrowers were given three months to regularise their payments.
“Financial institutions will from October 1, 2020, assess the performance of all loans that were performing before April 1. Borrowers whose loans were performing before April 1 and subsequently went into arrears, will have three months (up to end December 2020) in accordance with existing procedures to regularise their loans before they are listed with CRBs,” read the statement from the Central Bank of Kenya.
Sasha Hutchison, a certified management accountant in Texas, USA, says one should calculate what they have on hand before deciding on whether to go for a loan or not.
This, she says will help a person avoid getting into a panic mode by consolidating any little income from different sources.
“Calculate how much cash you have on hand, what’s in your portfolio — even though it is shrinking — and current debts. If anyone owes you money, it might be a difficult time to collect but still, know that it’s out there,” says Hutchison.
For anyone intending to borrow at this time? Understand the business cash flow and only borrow only if your projections are right.