Beyond banks: Your invoices could be your next collateral

Walk into almost any growing Kenyan small and medium enterprise (SME) and you'll find the same contradiction. The business is profitable on paper, yet the owner struggles to pay suppliers on time.

The money exists as it's sitting in invoices owed by supermarkets, manufacturers, county governments and corporate buyers who pay after 60, 90 or 120 days. Banks look at that business and ask for a title deed. A debt investor looks at the same business and asks a sharper question: Who owes you, and how reliably do they pay?

The banks' caution has a logic. The average lending rate rose to 14.4 per cent in September even with the Central Bank holding its policy rate at 8.75 per cent. Gross bad loans still sat at 13.9 per cent of the banking book that month.

Banks also held Sh2.53 trillion in Treasury bills and bonds by late September, just over 30 per cent of their assets. When government paper pays well and carries no capital charge, a small distributor with no land rarely wins the credit committee. The CBK's 2024 survey on MSME lending confirmed it; collateral remains one of the biggest walls between small firms and formal credit.

Debt investment flips that logic. Private credit funds, invoice discounting, factoring, supply chain finance and purchase order finance all underwrite the transaction rather than the land. The pool is growing.

Enko Capital's impact credit fund closed its first round at $100 million (Sh12.9 billion), anchored by British International Investment, to lend to mid-sized African businesses. Kenyan startups have raised $297 million so far this year, and much of it came as debt rather than equity. Cash flow lending in Kenya is no longer an experiment.

Here's how it works on the ground. A supplier delivers goods to a large retailer on 90 day terms. Instead of waiting three months, the supplier sells or pledges those verified invoices to a financier, who advances an agreed percentage upfront and collects from the retailer when payment falls due. The supplier restocks, takes the next order and grows.

From the recovery side of my work, I've learnt that the strength of the debtor matters more than the size of the borrower. A small firm selling to a disciplined payer is often a better credit than a big firm selling to everyone on loose terms.

The advantages over a bank loan are concrete. You don't pledge your home. Funding grows with your sales instead of a fixed limit reviewed once a year. Approval can move faster because the financier studies invoices rather than valuing land. And repayment comes from the customer who owes you, so the facility follows your trading cycle instead of fighting it.

The risks deserve equal attention. Annualised, invoice finance can cost more than a secured bank loan, so price it per transaction, not per month. Most facilities carry recourse, which means if your customer doesn't pay, you still do.

Concentration is dangerous, because a book that leans on one buyer can collapse with one dispute. Some providers notify your customers, which changes the relationship and some operators sit outside CBK supervision, so check licences, read the recourse and set off clauses, and know exactly what happens when an invoice goes bad.

Before you chase the next overdraft, look at your receivables ledger with fresh eyes. Are your invoices clean, acknowledged and backed by delivery notes? Do you know your average collection days per customer?

Could a stranger verify your top ten debtors in an afternoon? If yes, your debtor book is already collateral. If not, the real question isn't whether alternative finance is ready for Kenyan SMEs. It's whether we are ready for it, or we aren’t.