Start-ups cash formula in era of rate capping

Alternative financiers are getting increased applications from micro businesses. FILE PHOTO | NMG
Alternative financiers are getting increased applications from micro businesses. FILE PHOTO | NMG 

Cash-starved small enterprises (MSMEs) are increasingly warming up to alternative financiers as banks continue to lock them out of credit market due to perceived high-risk profile.

High cost of credit and lack of collateral to adequately cover for loans from commercial lenders, studies have shown, is the main reason most of these small businesses struggle to secure funds.

A third of 2.2 million MSMEs which shut down in five years through June 2016 blamed shortage of operating cash, according to a Kenya National Bureau of Statistics study of October 2016.

The findings of the KNBS Micro, Small and Medium Establishments study, which estimated the lifespan of the MSMEs in the country at 3.8 years, showed only 5.6 per cent of them secured funds from commercial banks.

Credit to the MSMEs, which usually lack collateral to guarantee recovery in case of default, has been going down since the interest rate capping was enforced in September 2016.

Inadequate formal financing in an economy dominated by the MSMEs has seen a growing number of venture capitalists and private equity (PE) funds scout for business opportunities.

Some of the alternative financiers keen on SMEs are Dutch-owned DOB Equity, agribusiness-focused Pearl Capital and Safaricom Spark Venture that was launched in 2004 to provide funds and technical support to entrepreneurs largely in mobile technology space.

Savannah Fund, which used to focus on techpreneurs in East Africa, has now spread its wings to cover other sub-Saharan Africa and Business Partners International (BPI) Kenya, a fund management firm with roots in South Africa.

Sally Gitonga, the BPI country manager, said enquiries from entrepreneurs have gone up, although the firm does not target the mass market.

“There are enqueries now coming from clients who maybe in the past would have gone to the banks,” Ms Gitonga said in an interview.

“While we would have expected the enquiries to be relatively lower because of lower economic activity this year due to elections and other macroeconomic factors, they are relatively high probably because the banks are not looking at these businesses.” BPI, which last year raised $36 million (Sh3.7 billion) for East Africa after closing a $14.1 million (Sh1.46 billion) fund for Kenya which was set up in 2005, says collateral is secondary under its financing model.

BPI’s decision to fund an enterprise to the tune of between Sh5 million and Sh100 million is largely determined by the ability and drive of the entrepreneur, Ms Gitonga said.

The due diligence, which takes an average of a month, also includes performance of the business compared to the industry’s average, risk profile, target market, competition and outlook.

The loan should be repaid in five years with a return of 14 per cent on average, which is structured in a way that recovery may take a form of a minority stake or quasi-equity, or a debt component which includes a revenue sharing scheme.

“We take risks on businesses we finance because many times the businesses we finance don’t have 100 per cent collateral and they don’t even have track record,” she said.

Firms which get funds from BPI are allowed up to a third of the total size in interest-free capacity building fund to help improve business processes, including revamping financial management, developing a good marketing strategy, training staff and getting certification.

“Business people and entrepreneurs in this market are very resilient, and working very hard to ensure they can succeed,” Ms Gitonga said.
“There’s a growing appreciation by these entrepreneurs to become more professional.”

The BPI fund is backed by World Bank Group’s International Finance Corporation, European Investment Bank, UK’s State-owned development financier CDC, East African Development Bank and Canadian Sarona Asset Management.