Loans are a great way to raise money for various needs, such as starting a business, purchasing assets or dealing with an emergency.
However, a 2021 report dubbed "SME Access to Financing" by a consulting firm, Wylde International revealed that in the last three years at least 45 per cent of Small and Medium Enterprises (SMEs) in Kenya were denied loan facilities.
The national government, through President William Ruto, committed to addressing financial inclusion and access to credit, which is critical in addressing the fundamental factors of the cost of living, job creation and people's well-being. This was through relooking at how credit reference bureaus rate borrowers when it comes to access to financing.
The Central Bank of Kenya (CBK) has also been working closely with banks in implementing risk-based credit pricing where financial institutions will be required to consider a borrower's credit score and other factors before making a lending decision.
However, as the government and financial institutions work to ensure a friendlier credit environment it is imperative to know how to improve one's creditworthiness. Banks and various financial institutions use creditworthiness as a valuation method to determine whether you or your business are viable to access a loan facility.
Being credit-worthy means that you can receive a loan and you have the capacity to pay it back.
But, how can you position yourself to be creditworthy?
Family Bank Head of Treasury Robert Ndua reveals four key factors financial institutions consider before offering loan facilities:
- A commendable character
Good character does not only involve honesty, integrity and respect but also financial discipline. A commendable character requires more than financial stability. It also includes your reputation or track record in repaying debts.
Character takes into consideration that despite having money, how is your repayment trend or habit? This provides assurance to the financial institution that you will be financially disciplined to repay back your loan.
To build a good financial character as a borrower, ensure that your credit history is correct and accurate and follow up on incorrect discrepancies because they can be detrimental to your credit history.
Also, consider implementing automatic payments on your recurring bills to ensure they are paid on time.
- Access to collateral
The SME Access to Financing Report indicated a lack of collateral as the major reason for loan denial. Collateral is any form of asset that can help you qualify for and secure a loan.
Collateral can take the form of a physical asset like logbooks, title deeds or financial assets like investment or cash.
For a financial institution to consider you creditworthy, you must have collateral to act as security in case you are unable to repay your loan.
- Sufficient cash flow
Cash flow refers to money coming in and out of your account. Before a financial institution lends you money, it needs to know that you or your business can generate enough cash flow to pay off the debt.
To increase your chances of receiving a loan facility, ensure you have consistent cash flow coming into your account and have more coming into your account than money leaving your account. Therefore, financial institutions require income verification.
Most lenders will require you to provide some documents to prove that you have a stable income and that you meet their minimum monthly income requirements. Having a stable income helps to determine whether you have the ability to pay back the loan. In most cases, you will be asked to provide a pay slip if you are employed, or bank statements if you are self-employed.
- Capital contribution
Being in possession of capital displays a huge sign of commitment. Capital contribution indicates that you as the borrower already have some level of investment.
Financial institutions will be more confident and comfortable in extending credit when you can put a down payment on a purchase or investment before extending a loan facility.
In an economy where few people can pay cash for a home, a car, education or even fund business capital in cash, the importance of credit cannot be underscored.
It is therefore important to consider strengthening these four Cs, namely, character, collateral, cash flow and capital to improve your chances of acquiring a loan facility. Family Bank trains MSMEs on how to position themselves as credit-ready for financing opportunities.
