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Monday, March 5, 2018


Survey after survey of the business community points to the lack of access to finance or the high cost of finance.

The reduction in the Central Bank Rate (CBR) to its lowest ever at nine percent recently should promise some relief, as banks peg their lending rates to it.

So hopefully we should be seeing an uptick in business activity. I doubt.

At least nine in every ten businesses in our economy is a small or medium enterprise (SMEs). According to Uganda Investment Authority (UIA) companies in this category do not have an asset base exceeding sh360m.

One way the narrative about financing our businesses gets it wrong is that we think commercial banks would be the key financers. Commercial banks are more comfortable with and their products are structured to support going concerns – businesses which are consistently profitable or at least have consistent cash flows, which is not what can be said for most of our SMEs.

"The challenges of financing SMEs are many but the principle ones are that they have no or inadequate assets that can serve as collateral, relatedly they have low profit levels or liquidity to ensure repayment and have unsatisfactory business plans to give an indication of what the business is up to, where it is going...

A different kind of financing is needed for our SMEs, which gap is not being filled, presumably because it is too much work and too risky.

SMEs are often started using the funds of the founder. These are either savings or even loans borrowed against other income. The beauty of such funding is often the proprietor has written them off – consciously or unconsciously, as soon as they are out of his pocket.

The next best funding is from family and friends. Depending on the business acumen of these returns may not be required soon or ever.

Were it not for such startup financing most businesses would not take off. But they are rarely if ever huge sums.

The next level of financing may come from angel investors. These may or may not be family, but they are often wealthy benefactors willing to chance their money for a reasonable return. This is where Uganda entrepreneurs may get stuck.

This kind of investor may be a bit sophisticated, would want to see the business books, a business plan and have an in depth interview with the business promoters. If you are not clear about how you make money, how you use the new money and what returns the investor can expect.

This funding can be useful if the funder is not asking for immediate returns and is in it form some share of the business. If the business collapses he may walk away to lick his wounds and not follow up on his shillings.

"But the informal way we conduct our business means we would not be attractive to such investors, who can marshall significant resources on the strength of their own reputation and may even throw in the benefit of their business experience...

By this point hopefully your cashflows are growing and consistent. It may be the time to consider borrowing from the bank. Unlike the financing the business has been relying on up to this point, the bank will not be as patient. At the basic level the repayment schedule will kick off straight away, which can put enormous pressure on the business’ working capital.

The challenge for many of our businesses is that we forgo the patient capital for commercial bank loans. Before we even begin to think about the cost of that funding, the demand and discipline of regular payments against a backdrop of an uncertain business environment, often does in our business.

The point is that one should be thinking of different financing for different stages of the business and it is only until the business model has been shown to work – there is enough demand for the good or service you are hawking, that scaling up can be considered.

Our businesses often collapse spectacularly because we start to scale up before the business model is working. We use the wrong financing at wrong stage of the business development. But most importantly we are not meticulous in our record keeping, meaning we don’t know what we are doing wrong and therefore continue to replicate our errors. And probably worse, we don’t know what we are doing right and therefore cannot replicate it.

"Our financing challenges are more a function of lack of organisation, thereby reducing our bargaining power in the market...

One local example jumps to mind. One local business with a need for urgent working capital discovered it could leverage its near money assets for a bank overdraft. While the cost of the overdraft was more than 20 percent at the time, since they have been exercising the facility – two years now, they paid 3.7 percent in interest for the facility last year and 5.7 percent the previous year.

Another business recognised a need to beef up its balance sheet went to its shareholders and managed to raise sh200m to boost the business. It helped that the business’ records showed that their initial investment was valued at many times over the value of their initial outlay and that the projections, assuming the business was even half as successful over the next ten years, meant the pattern of capital accumulation was bound to be repeated. The new equity infusion, apart from the arranging costs – mostly mineral water, has cost the business almost nothing to date.

The point is that the story of expensive financing our market is a convenient excuse for many of our businesses poor management practices. That and our unwillingness to relinquish some share of our businesses to other partners. But that is a story for another day.

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