SMALL and medium businesses in East Africa should be looking at ways to maximise their efficiency and improve debt management to navigate the risks that high interest rates pose for their businesses.
According to Billy Owino, regional director for Sage East Africa, business builders feel the pressure of rising interest rates more severely than their larger counterparts. Big business and government policymakers should therefore look at ways of helping smaller businesses manage the challenges they face as a result of high interest rates.
Owino notes that SMEs are central to the region’s economy, generating a large proportion of income, tax revenues and jobs. In Kenya, for example, SMEs are estimated to account for more than 80 percent of job opportunities. ‘A vibrant small and medium business sector creates inclusive growth and tax revenue – which is why governments in the region see small business as a priority,’ he says.
Though interest rates have started to ease somewhat across East Africa, they remain relatively high in countries such as Uganda and Kenya after central banks acted in the past two years to protect currencies from depreciation. For many SMEs, this has been a handbrake on growth, says Owino.
On the one hand, higher interest rates mean that many consumers have less money to spend, particularly on luxury goods. On the other, it means that many small businesses are paying more to service overdrafts, car loans, commercial mortgage repayments and credit card debt.
Unlike large businesses, many small businesses need access to credit to fund growth or bridge temporary blockages in their cash flow because they don’t have big cash reserves, says Owino. High interest repayments might affect the sustainability of those who are already operating on tight margins—raising the risk of default, foreclosure and even bankruptcy.
Governments in the region have taken some steps to counteract the effects of high interest rates on consumers and small businesses. The Kenyan government, for example, introduced a law capping bank interest rates at 4 percentage points above the central bank’s benchmark rate.
Though this has helped to contain interest rates banks charge their customers, there is a danger of unintended consequences such as banks charging other fees to make up for the income they lose, says Owino. Another idea with potential to make a difference is government helping to fund small businesses through small business funds.
‘By supporting business builders with loans at low interest rates, governments can help create jobs and tax revenues for tomorrow,’ says Owino. ‘Many development banks run by government and international multilateral institutions such as the International Finance Corporation are making a difference, but access to finance is still low among East African small and medium businesses.’
Owino says, high interest rates are likely to be part of the landscape for the medium-term and offers some advice on debt management to minimise the impact on SMEs.
He says SMEs must look for ways to reduce wastage and inefficiency to ensure faster debt servicing or avoid taking a loan in the first place. A robust accounting system can also help entrepreneurs to better understand expenses and find ways to cut costs.
It is also important to negotiate favourable credit terms with suppliers. ‘If you can get 30 days to pay for stock, interest-free, that’s preferable to using an overdraft,’ he advises.
‘Stay in touch with your creditors. Rather let your lenders know immediately when you are struggling to make your repayments. This will give you an opportunity to negotiate new terms rather than incurring massive penalty interest and harming your relationship with the bank or suppliers,’ he adds, stressing that it is better pay off the debt with the highest interest rates first.