Business Plan Borrowing Over Collateral Loans

Have you walked into a bank and failed to secure a loan for lack of sufficient collateral? This is common when one is looking for funding to start or scale their business. But why does the conventional banking regime insist on loan collateral? Every commercial bank has a committee of credit approvers who analyze the risks involved in advancing credit to applicants. This committee is commonly referred to as BCC in Kenya’s banking boardrooms. It relies on an applicant’s credit rating from a credible credit reference bureau, turnovers in sales as indicated in bank statements and the amount of collateral provided by the borrower to secure the loan. This criterion limits many entrepreneurs from accessing seed and growth capital for insufficiency of collateral in assets like land, buildings, vehicles and stock.

A paradigm shift is now happening where ambitious entrepreneurs, large established businesses and strong institutions are banking on the strength of their strategies to convince lenders to fund their growth. This concept was first embraced by fund management companies before a handful of commercial banks adopted similar credit approval policies for business borrowing. So what exactly is business plan borrowing? The question can best be answered by explaining the concept of partnerships in business. Partners join efforts to complement each other. One may offer their professional practice while the other may help with marketing, funding or technology expertise. Anytime you involve a partner in your business, it becomes necessary that you document your vision and ways of attaining that vision. This provides harmony between partners and helps to test the scalability, sustainability and profitability of the business in the future. When borrowing from a fund management company, a business plan unites the entrepreneur’s vision with that of their lending partners.

Fund management companies will be comfortable lending to establish entrepreneurs whose financial requirement is significant or at least USD 100 million and return on investment projected to be at a higher rate than the interest rate. Business Plan loans are however classified as risky loans thus attracting higher interest rates in the range of 14% to 19% while collateral–based borrowing in Kenya attracts an average inveterate rate of 13% across top–tier commercial banks. It is therefore advisable to partially secure your business plan loan where possible in order to negotiate for lower interest rates. Business Plan loans also work best for thriving sectors where cash flows can accurately be forecasted.

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