NAIROBI, Kenya, Oct 8 – Small and medium-sized enterprises need financing that reflects their cash-flow patterns, business stage and growth plans, Family Bank officials have said, noting that businesses can face pressure when their income does not come in at the same time as their expenses.

Speaking on Capital in the Morning, Family Bank financial products specialist Nicholas Kariuki said cash-flow management can be a major challenge for businesses, particularly where payments are received after expenses have already fallen due. “So, probably on the cash flow side, which might be a bigger killer than maybe even lack of profits, right?” Kariuki said.

He said businesses may need to purchase stock, pay suppliers or meet other operating costs while waiting for expected payments, creating a gap that can be addressed through different forms of financing. “So then broadly speaking, you have a mismatch of receivables, the money you’re expecting, you expect to expend, come to us, we would then bridge that gap through lending,” he said.

Family Bank Asset Financing and SME Specialist Daniel Azenga said the financing needs of an enterprise also change as it moves from startup to growth and eventually becomes a mature business. “Financing the immediate need without the full picture, that’s how a good business gets a bad loan,” Azenga said.

Using the example of a hardware business in Kitengela, Azenga said a new enterprise may initially require working capital to stock its premises and payment collection facilities, while a growing business may later need asset financing to acquire a vehicle or equipment.

“It’s the journey, right? So, what we try to do and what we strive to do is to understand the different stages of these MSMEs,” he said.

Azenga said startups may need accounts and collection solutions, growing firms may require working capital and assets, while mature businesses may need trade finance, investment and succession solutions.

He also said financing should take into account the period within which a business receives money from its customers. “So we’re not just talking about lending on a collateral basis, but we’re also understanding the cash flow cycle for that particular MSME,” Azenga said.

Kariuki said Family Bank was also looking at lending models that consider the performance and cash flows of a business rather than relying entirely on traditional collateral.

“So, trying to change the structure away from possibly collateral-only to more cash flow-based, understanding your business, then financing based on literally how you manage your business, how does it operate,” he said.

He said factors such as how long a business has operated, whether its transactions can be traced and the extent to which it is formalised or digitised can help a lender understand the business.

“The money that you earn, is it traceable? To what extent, for example, is your business formal or digitized? How long have you been in business, and so on and so forth?” Kariuki said.

The discussion comes as the Central Bank of Kenya continues to monitor access to financing by MSMEs. Its 2024 Survey Report on MSME Access to Bank Credit found that the value of the MSME loan portfolio stood at KSh784.3 billion as of December 2024, while active MSME loan accounts declined by 24.7 per cent from 1.18 million in December 2022.

The CBK also reported that MSME loans accounted for 21.4 per cent of the total banking sector loan portfolio by value in December 2024. Commercial banks charged an average interest rate of 16.4 per cent on MSME facilities, compared with 26.3 per cent among microfinance banks.

Kariuki said technology was increasingly providing lenders with additional information that could be used in assessing businesses, particularly as more transactions move through digital platforms.

“Because the converse would be, the reality of if you must provide, for example, on the collateral side, if it doesn’t exist, and that’s a fair fact, does that mean we stop lending? So then, we must look at other means, other data points,” he said.

Azenga cautioned businesses against using a financing facility for a purpose that does not match its structure. He said, for example, that an overdraft intended for short-term working capital should not be used to finance a long-term asset such as a vehicle.

“So let’s say they come to the bank, you want an overdraft for let’s say 2 million, and then you quickly run to a yard and buy a small pickup. Now that’s an expensive affair, if I may put it that way,” he said.

He said understanding the customer’s business should therefore come before determining the appropriate financing product.

“And I always like putting it this way: The loan is one moment, the relationship is the whole journey,” Azenga said.

The officials also discussed financing for investments intended to improve efficiency and reduce operating costs. Kariuki cited equipment, solar power and mechanisation as examples of investments that may require significant upfront spending but could improve productivity or reduce costs over time.

“From a financing perspective, in general, we would finance items that lead to efficiency, lead to reduced costs, and as well, that ensures more sustainability,” Kariuki said.

For MSMEs, the discussion points to the importance of determining the purpose of borrowing, understanding the business’s cash-flow cycle and choosing a facility whose repayment structure corresponds with how and when the business generates income.

The CBK survey shows that banks already offer a range of products targeting different categories of MSMEs, with more than half of commercial banks offering products serving micro, small and medium enterprises.

The financing decision, the officials said, therefore goes beyond the amount a business can borrow. It also involves considering what the funds will be used for, when the business expects to generate income and how the financing fits into its longer-term growth.