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Common Sources Of Business Financing Available In Kenya.

Unlike businesses in more developed countries, Kenyan businesses tend to use debt or equity financing. This is due to the lack of development in the finance landscape.

Equity financing is when shareholders provide funding to the business in exchange for partial ownership of the company. This type of financing is common among established businesses.

Debt financing is when a business takes out a business loan from a financial institution. This is the primary way to raise funds for small and medium start-up businesses.

Debt Sources to Run Your Business

African entrepreneurs are not immune to the fact that there is little in the way a saving culture in the country. With little in personal savings most have to rely on debt to start and even grow their companies.

According the same study over 60% relied on debt financing to survive. Some of the biggest sources of debt financing in Kenya include:

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Commercial Banks

Kenyan banks have tapped into this business offering various products. These include offering a bank overdraft, asset financing, credit cards, unsecured loans, trade credit and more.

However, bank loans are not easy to get especially if a business is not established. Further to that, current interest rates are high with some banks charging over 20% per annum. This is further compounded by variable rate interests that these banks charge.

It is difficult if not impossible for early-stage start-ups to get a decent rate of return on such loans. That is the reason most entrepreneurs don’t bother looking for funding from banks.

Micro Finance Institutions (MFI’s)

By 2020 there were about 14 micro finance institutions in Kenya. 85% of the Micro, Small, and Medium-sized enterprises in Kenya are informal. MFI’s were established to help SME’s and MSME’s to access credit that was impossible to get from commercial financial institutions.

In Kenya, microfinance institutions provide a wide range of financial services, including deposits and savings, transactions and payment services, loans, and bancassurance services.

One of the biggest problems with MFI’s is that their interests are usually excessive. They usually demand secured loans and in most cases demand that one joins one group or another. It does require a tough entrepreneurship mindset to grow a new business through MFI’s.


Financing Growth Through Suppliers

Financing growth through suppliers can be an effective means to promote your startup’s growth without placing undue pressure on your cash flow. There are three ways to do this.

  1. Get extended credit from suppliers, usually 30 to 90 days.
  2. Buying on consignment. Where you only pay for goods that have been bought.
  3. Supplier Managed Inventory. This usually promises a healthy return as one has little on no risk to your own capital.

This kind of financing is particularly advantageous for startups or innovative companies that have fluctuations in demand.

Get Funding Through Invoice Factoring

Invoice factoring is a simple way of financing small to medium organisations that allows them to sell their invoices at a discount in order to receive immediate cash. This cash can be used to finance day-to-day operations, expand the business, or take advantage of early payment discounts from suppliers.

Invoice factoring is a flexible financing solution that can be tailored to the specific needs of your business

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Leasing and Lease Financing

Lately, instead of taking a normal bank term loan or simply to reduce the cost of finance, companies have adopted lease financing.

It is a form of financing used by companies to pay for the use of assets. The lessee makes payments to lessors, typically over the duration of the agreement.

This financing can be used to finance the acquisition of a wide range of assets, including equipment, vehicles, and real estate. It reduces the financial risk of ownership of assets that a company would have to bear in the long term.

Raise Capital Through Debentures

Financing through debentures is a popular option for businesses looking to raise money. Debentures are loans that are backed by the full faith and credit of the issuing company. This means that if the company defaults on the loan, the debenture holder is still entitled to be repaid.

Debentures are typically issued at a fixed rate of interest, making them an attractive option for businesses looking for predictable cash flow.

The problem with raising funds through debentures is you need to have good knowledge of corporate financing. It’s also not easy to find a financial investor willing to take a risk in your business.

Sources of Equity Finance and Equity Investors

The best source of financing in Kenya is simply equity and share capital. This may be in form of ordinary share capital or preference share capital. The idea is to get a long term partner who funds the day to day running of the business for the long term.

This may include offering all the investors shares in your company through limited companies rather than debt finance.

It’s extremely popular as it reduces the risk to you while only promising payment through ordinary dividends, share issue, rights issues and profit from growth in equity value.

The goal for all founders including angel investors and venture capitalists is to be listed by the Capital Markets Authority in the stock market. Typical sources of equity investment include:

Founder’s Equity

Many a start-up company start from a business idea by the founders. The founders then use any form of funds from their bank balance, insurance, home loans or even sweat capital to start their business.

In fact, most set-up costs and raw materials are funded by the founders of the business. It’s not only a great business plan but can also be used to prove potential profitability before considering another source of capital.

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Family and Friends

One of the most popular ways for small businesses to get financing is from their friends and families. You could use this method if you already know some of the people who might be able to help you out.

They may be more likely to lend you money than banks or other institutional investors.

Despite the fact that this is a valid choice, it also has its disadvantages. For example, if you do not repay your debt, you may damage your relationships. Even more, you may wind up having to pay higher interest rates for a conventional loan.


Angel Investors

Angel investors in Kenya are individuals who invest in early-stage companies in exchange for equity. They provide smaller amounts of money than venture capital firms, but they can prove to be a good source of funding for startups that are too early for VC funding.

They are usually professional investors who believe your business idea. Most of them can give loan capital or just require preference share capital as your company grows.

The positive is business angels come in at the early stages of development and come with a lot of management knowledge. The negative is that their goal is to hold an equity position in your company that may prove costly in the long run. However, as this is seed startup funding that you need, they may be less risky than term capital from banks.

Venture Capital in Kenya

Venture capitalists invest in high-risk, high-payoff projects. They are providers of capital to companies hoping to get off the ground. In return for their investment, venture capitalists generally receive an equity stake that allows them to monetize and make extreme profits from the company.

Though venture capital companies in are still new, they are now the most popular sources of funding in the high-tech sector.

Incubators and Accelerators

Incubators and accelerators in Kenya have become increasingly popular as options for young companies that sought funding, mentorship, and other resources.

Some of the more popular entrepreneurial sources include Nailab, iHub and more. They are very popular with Kenyan youth especially since they also offer sharing services and business connections.

Just like Angel investment, they do require a good return on their investment plus a stake in your business. There are still a lot of negative stories that come from some of these incubators. As such it’s important to understand their terms before committing yourself. Only ask for the money you need.


Crowdfunding

Crowdfunding is a method of financing a project or venture by raising small amounts of money from a large number of people. It’s like an extension of your friends and family. Only that you don’t know them.

Usually, crowdfunding is done through a crowdfunding platform, such as Kickstarter or Indiegogo, where people can make pledges to support the project.

Crowdfunding should be considered a possible source of business funds to start a business, but be wary. Be prepared, work hard, and create a winning strategy for soliciting backers before you launch a crowdfunding campaign.

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Government Grants and Public Financing

The Kenyan government is greatly involved in financing small and medium sized businesses. This is through various government programs that offer grants, start up capital and even the entire investment in a project.

These are a great and cheap form of financing for most businesses as it usually doesn’t require repayment and in some cases offers a better market rate than other external sources.

All you need to do is to apply for a grant in any of these funding opportunities:

  • Youth Enterprise Development Fund
  • Women Enterprise Fund
  • Agriculture Finance Corporation
  • Uwezo Fund
  • Kenya Industrial Estates

These government grants offered not only help start your business but also help in job creation

Bootstrapping for Business Development

Lately there has been a trend by small business owners in adopting bootstrapping as a source of working capital. This is where a business owner uses the company revenues to fund growth.

The main benefit of bootstrapping is that it allows the business owner to retain complete control over their business. They are not beholden to outside investors and can make all the decisions regarding the business themselves.

Additionally, bootstrapping can be a very cost effective way to finance a business venture. Often times, businesses that are financed through traditional means such as loans or venture capital end up paying a much higher cost in the long run.

In Conclusion

There are various way of raising money for your business idea. All the way from private equity to what banks offer. Many companies are willing to help you achieve your goals. All you need to do is figure out the type of investment you are and choose from the many funding options available to you.

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