Have you ever wondered what the long term sources of finance in Kenya might be. In our article today, we will discuss top 7 sources of long term finance in Kenya. We will discuss each source in details and outline the benefits of using the said source.
Let’s begin with defining the term ‘Long term sources of finance’
According to the World Bank, long term sources of finance are any financial instruments that their maturity period/s exceeds a year. Raising capital for your business is usually the hardest part that any entrepreneur or business owner has to go through. However, with the right knowledge, it may be very easy to know exactly how to raise just the right amount of cash that you would need to start your business.
However, it is very important to always evaluate each source of finance before finally choosing the one which would work for you.
Top 7 sources of Long term finance in Kenya
- Loans from financial institutions
- Equity Shares
- Preference shares
- Retaining profits back into the business
- Venture Fund
Below, we will discuss each source in details.
Loans from financial institutions
Acquiring loans from financial institutions in order to fund your business is one of the major and mostly used sources of long term capital. A bank will always lend you money if you can clearly show that you are capable of repaying the loan back in time.
In Kenya, we have some financial institutions established at the national level to help finance businesses. These institutions include the development bank of Kenya, Youth enterprise development fund among many others.
Moreover, there are some other private financial institutions that offer loans to businesses. These financial institutions include but are not limited to Kenya Commercial Bank, Co-operative bank, Equity bank among other. Each of these banks offer loans at friendly interest rates to its customers.
The main advantage of using this long term source of financing is that their repayment period is longer between 6 – 10 years. On the other side, some banks may have restrictive policies on their contracts which may be very limiting.
Read More: Top 5 Business Loans by KCB Bank
2. Equity Shares
Equity shares is the main source of long term finance for most business. Equity shares is also referred to as ordinary shares. A business owner raises capital for his/her business by selling a stake of ownership of their business. A person who has bought these shares becomes the owner of the business and can participate in making decisions.
This source of financing is the best as the owner gets to spread their risk. If things go wrong, the loss will be shared among all the owners of the business and therefore he does not have to suffer the whole liability alone.
Moreover, though equity shares a business gets permanent source of finance. As a result, one will not be bound to pay dividends each year but only when all the owners have agreed.
Raising capital using equity shares is less risky and the best way to raise funds for your business.
3. Preference shares
Preference shares is the other source of long term finance for businesses in Kenya. These shares work the same way as equity shares only that they have fixed dividend rate and that have to be paid. In case the business goes into liquidation, these shares have to be paid first. Preference shares have a fixed term and they have to be paid back.
4. Retaining profits back into the business
If the business that needs financing already exists, then it may be possible to raise long term finance by retaining the profits you make in the business. You may decide to pay only a percentage of the profits to the investors and reinvest the whole chunk back into the business. When this happens it is referred to as the act of ploughing back profits.
This method of raising long term financing is very economical as one will not have to repay back interest rates which sometimes may be prohibitive.
However, when this is done excessively, the firm may end up misusing all the funds instead of using them to grow the business.
The other ways that a business could use to raise funds is by issuing debentures. A debenture certificate is a document that a company issues to the individuals it owes money to. These loans may be for a period of either five or ten years.
Moreover, debentures are unsecured loans. Therefore all a business has to do is to repay them back within the period agreed upon.
At some point during expansion, a business owner may need to buy some assets such as office space and machinery. If at the said time of this need the business owner lacks the amount of cash needed. Leasing may be a good option. In Nairobi, most businesses operate in leased offices which are way cheaper as compared to buying or even getting a mortgage.
At the end of the lease both the lessee and the lessor may agreed on whether to buy off the item or asset or extend the period of their lease.
7. Venture capital
Venture capital financing is the newest mode of long term financing for most start up. Instead of acquiring a loan from a bank, one may opt to offer a part of their equity stake for them to get funding. Despite the process of acquiring venture funding being long, this source of long term financing is still one of the best. Most times, an entrepreneur may also be mentored by some of industry leaders in his field if they opt to invest in his business.
Conclusion on Long term sources of finance
Equity shares and Preference shares are the best sources of long term finance for any business that is starting out. However, if the business has been in operation for a while it is important to try retaining most of its earnings instead of looking for external sources of finance.