Kenyans have been warned against using overdrafts to finance long-term investments such as vehicles and equipment. Peter Mugeni, Managing Director of HFCB Limited, said that mismatched borrowing periods can strain business cash flow and make loan repayments difficult. He advised entrepreneurs to match the duration of their loans to the period their investments are expected to generate income. This caution was given in an interview with the Kenya Bankers Association.
Mugeni explained that overdrafts are designed primarily to meet short-term working capital requirements. They allow businesses to bridge temporary cash-flow gaps while awaiting payments from customers. The borrowed funds should ideally be replenished through business revenue within a few months. Using an overdraft to purchase an asset expected to generate returns over several years could leave the facility continuously utilised, increasing interest costs.
A business purchasing a vehicle expected to generate revenue over four years, for example, should consider a financing arrangement whose repayment schedule reflects the vehicle’s income-generating lifespan. This is rather than relying on a short-term facility. Mugeni also cautioned entrepreneurs against taking loans before establishing whether their businesses can generate sufficient cash to service the debt. He advised start-ups to rely on their own capital during the early stages.
Start-ups should build a financial track record and seek bank financing once their operations can support regular repayments. Mugeni said bank debt may actually be constrained, as lenders have a responsibility to safeguard customer deposits and must assess borrowers’ capacity to repay before extending credit. He urged entrepreneurs to prepare realistic business plans and sales projections before determining how much financing they need.
Borrowing decisions should be guided by actual market demand, expected revenue, and the additional production capacity required to fulfil orders. For instance, a business producing 3,000 litres of avocado oil monthly but facing demand for 6,000 litres should first calculate the cost of expanding production. They should determine whether the additional sales would generate enough income to cover the loan repayments.
Mugeni recommended that businesses allocate no more than 50 per cent of their free cash flow to loan repayments after accounting for operating and maintenance expenses. The remaining cash would provide a buffer for taxes, unexpected costs, and other business obligations. This reduces the risk that debt repayments would disrupt daily operations. He also urged borrowers experiencing financial difficulties to approach their banks early.
Businesses facing delayed payments from customers, including government agencies, should notify their lenders promptly to explore possible solutions. These solutions may include temporary financing support or an extension of repayment periods. Mugeni noted that restructuring a loan does not automatically damage a borrower's reputation. He added that banks have an interest in the survival and growth of businesses because borrowers' ability to repay depends on their continued operations.
Key points
- Entrepreneurs should match loan duration to the period their investments are expected to generate income.
