Getting a business loan from a commercial bank can be difficult, particularly for small businesses and entrepreneurs who do not have enough collateral, a long credit history or consistent financial records.
A bank rejection does not necessarily mean that your business cannot access financing.
For business owners who are members of Savings and Credit Cooperative Societies (SACCOs), a cooperative can provide an alternative source of credit. Depending on the SACCO and the member’s financial position, financing may be available through savings-backed loans, business loans or other credit products.
However, SACCO financing is still borrowing. The amount, cost and repayment terms matter. The goal should be to obtain capital that the business can repay without creating another financial problem.
Start with the SACCO you already belong to
If you are already a SACCO member, begin by asking what business financing products are available.
Many SACCOs link a member’s borrowing capacity to factors such as savings, income, repayment ability and the security provided for the loan.
Your history with the SACCO can therefore become important when you apply for credit.
Before making an application, ask about the maximum loan amount, interest rate, repayment period, processing fees, security requirements and other charges.
Do not assume that the terms offered by one SACCO will be the same as those offered by another.
Build your savings before borrowing
Savings can play an important role in SACCO borrowing.
A consistent savings record can demonstrate financial discipline and may also increase the amount a member can access, depending on the SACCO’s rules.
For an entrepreneur who has been rejected by a bank because of limited borrowing history, building a stronger savings relationship with a SACCO can provide another route to credit.
This does not mean saving simply to qualify for a loan. Savings should also provide the business owner with a financial cushion and reduce dependence on borrowed money.
Consider a savings-backed business loan
Some SACCOs allow members to borrow against their savings, subject to the SACCO’s lending rules.
This can be useful when a business needs working capital to purchase stock, pay suppliers, expand operations or manage a temporary cash-flow gap.
However, using savings as security does not remove the obligation to repay the loan.
The member should understand what happens to the savings if the loan falls into default.
Use guarantors responsibly
Where collateral is limited, a SACCO may offer financing backed by guarantors, depending on its lending policy.
This can make borrowing accessible to entrepreneurs who do not own property that can be used as security.
But guarantorship comes with responsibility.
A person who guarantees your loan may be required to meet the outstanding obligation if you fail to repay, depending on the agreement and the SACCO’s rules.
For this reason, entrepreneurs should never pressure friends, relatives or colleagues into guaranteeing a loan they cannot afford to support.
Know exactly how much capital the business needs
Being rejected by a bank can create the temptation to borrow from several sources at once.
Avoid this approach.
Start by calculating the actual amount the business needs.
If you need Sh500,000 to purchase inventory, borrowing Sh1 million simply because the money is available can increase your repayment burden without necessarily improving the business.
Separate essential business expenses from things that can wait.
A clear capital requirement also makes it easier to explain to the SACCO how the money will be used.
Explain how the business will repay the loan
A SACCO will want to know whether you can repay the money you borrow.
Prepare basic business records showing sales, expenses, profits and cash flow.
Even a small business should keep records of daily sales, purchases, operating expenses, debts owed by customers and money owed to suppliers.
These records can help demonstrate how the business operates and allow you to make a realistic repayment plan.
Do not base the repayment plan on your best month. Use realistic business income, including periods when sales are lower.
Separate business money from personal money
Mixing personal and business finances makes it difficult to determine whether a business is actually making money.
If business revenue is deposited into the same account used for household expenses, the owner may struggle to establish how much money is available for loan repayment.
Where possible, maintain separate records or accounts for the business.
This also gives the entrepreneur a clearer picture of business performance before taking on additional debt.
Use the loan for activities that can generate returns
The purpose of the loan matters.
Borrowed money should ideally be directed towards activities that strengthen the business or generate additional revenue.
For example, capital may be used to purchase stock that can be sold, acquire equipment that improves production or finance an expansion supported by customer demand.
Using business credit for unrelated personal expenses can leave the business with the debt but without the additional income needed to repay it.
Consider asset financing where appropriate
If the business needs equipment, machinery or another productive asset, ask whether the SACCO has a financing product designed specifically for that purpose.
Asset financing can sometimes be more appropriate than taking a general-purpose loan and using the money to purchase equipment.
The right product depends on the SACCO’s offerings and the nature of the business.
Before signing, compare the total financing cost and understand the security arrangements.
Do not use one expensive loan to repay another
A business facing cash-flow problems may be tempted to take a new loan simply to clear an existing one.
This can provide temporary relief while making the underlying problem worse.
Before refinancing existing debt, determine why the business is struggling to make repayments.
If sales are falling, expenses are too high or customers are taking too long to pay, another loan may not solve the problem.
In some cases, restructuring existing debt or negotiating revised payment terms may be more appropriate.
Compare SACCO financing with other options
A SACCO can be an alternative to bank financing, but it should not automatically be treated as the cheapest option.
Compare the total cost of borrowing.
Look at the interest rate, repayment period, processing charges, insurance requirements, penalties and any other fees.
You should also consider how frequently repayments are required and whether the repayment schedule matches the business’s cash-flow cycle.
The cheapest-looking monthly payment can become expensive if it stretches the loan over a much longer period.
Strengthen your financial records for future borrowing
A bank rejection can also be treated as a signal to improve the business’s financial profile.
Keep proper sales records, file required tax returns, maintain business registration documents and separate personal and business finances.
Maintain a record of loan repayments and avoid unnecessary defaults.
Over time, stronger financial records can make it easier to approach different lenders and negotiate financing.
Know when not to borrow
Sometimes the smartest response to a bank rejection is not to immediately find another lender.
If the business has declining sales, persistent losses or no clear plan for generating additional income, additional debt could increase financial pressure.
In such circumstances, the entrepreneur may need to first reduce costs, improve sales, collect outstanding debts or rethink the business model.
Borrowing should solve a genuine capital problem rather than cover up a business that is consistently losing money.
A SACCO can be a financing partner, not just a lender
For an entrepreneur who has been turned down by a bank, a SACCO can provide another avenue for accessing capital.
Its usefulness will depend on the SACCO’s products, the member’s savings and credit history, the available security and the business owner’s ability to repay.
The best approach is to borrow with a clear purpose.
Know how much the business needs, understand the full cost of the loan, prepare reliable financial records and make sure expected business income can support the repayments.
A SACCO loan can help a business buy stock, acquire productive assets, manage working capital or expand operations. But the financing works best when the debt is matched with a realistic business plan and a repayment strategy.
Author: Andrew Walyaula
Andrew Walyaula is a seasoned multimedia journalist. Email: [email protected]
