Loan Approval Does Not Guarantee Business Viability, Experts Warn

Experts are warning Kenyan entrepreneurs that loan approval does not guarantee business viability. A loan approval merely confirms a lender's willingness to advance funds on set terms, not that the borrower's operating cycle can sustain those obligations. This is a crucial distinction for business owners to make, as loan approval is only the first step in securing funding.

The cost of borrowing is also a key consideration for entrepreneurs. Kenya's central bank publishes a weighted-average commercial bank rate of 8.75 percent, but this benchmark does not translate directly into the price any individual borrower will pay. For example, an illustrative amortising loan of Sh1 million at an 18 percent nominal annual rate, charged monthly on a declining balance, results in roughly Sh91,680 monthly payments and about Sh100,160 total interest over twelve months.

Cash-flow timing is another critical factor for businesses to consider when taking out a loan. A business that receives major customer payments quarterly may find two months of insufficient cash despite an apparently affordable annual debt service, leading to penalties or the need for additional borrowing. This highlights the importance of aligning loan design with the rhythm of a firm's cash conversion cycle.

Borrowers are urged to stress-test scenarios such as lower sales, delayed payments from a key buyer or rising input costs, as combined shocks can overwhelm a facility that appears viable under isolated assumptions. This can help businesses prepare for potential risks and make informed decisions about their funding options.

Security arrangements, including personal guarantees or charges over family assets, can extend risk beyond the enterprise and should be explicitly evaluated before signing. Entrepreneurs must carefully consider the terms of their loan and the potential consequences of default.

Refinancing may lower the nominal rate but can introduce exit fees, valuation costs and longer indebtedness, so borrowers must compare cash-flow impacts rather than headline rates. Digital-credit platforms offer rapid disbursement, yet the speed can encourage treating loans as convenience items, potentially leading to overlapping facilities that strain a consolidated debt calendar.

Ultimately, entrepreneurs are reminded that declining an unsuitable loan is a strategic choice; accepting finance that the operating model cannot support may erode capital and increase vulnerability. By carefully evaluating their funding options and considering the potential risks and consequences, businesses can make informed decisions and set themselves up for success.

Key points

• Loan approval does not guarantee business viability
• Cash-flow timing and hidden costs must be carefully considered
• Borrowers must stress-test scenarios and evaluate security arrangements