Are PE And Mezzanine Financing The Answer To SMEs Funding Hurdle?

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photo|businessdailyafrica.com

 By ERIC MAGU

The lack of access to finance is one of the most prevalent challenges entrepreneurs and business owners face. Due to the interest rate regulation, Kenyan banks are now much more selective, preferring to focus their efforts and credit on larger corporates which have good borrowing standing and the advantage to offer collaterals.

In September 2016, the banking sector in Kenya started to operationalize the Banking (Amendment) Act 2015. This law sought to set the maximum lending rate at no more than four percent above the Central Bank rate. With this regulation, banks became more risk-averse towards borrowers since they could not charge higher rates to compensate them for the additional risk they were taking.

The perception exists among many local banks that Small and Micro Enterprises (SMEs) have insufficient assets or collateral, making them a riskier and therefore less desirable proposition.

Banks fail to tailor debt-service schedules according to a given business plan, and tenors are often very short term, usually three years, which is not the type of patient capital small and medium sized companies need to grow.

There is typically a mismatch between the debt structure and the entrepreneur’s business plan. This lack of access to bank loans leaves the SMEs to the other available option of turning to private equity and venture capital for early stage and growth capital…Read more>>

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