Loans or savings: which is best for a start-up in Kenya

One question that many Kenyan youths ask is should I borrow to start a business or should I save then start the business. The truth is both are viable options with their advantages and disadvantages.

Entrepreneurship is a tricky path to follow. Most of the time, as a new entrepreneur, you need not just the knowledge but a mentor to help you navigate these murky waters. Luckily offers both Mentorship and great online entrepreneurship courses.

But even with that said, you still need to understand the difference between starting your business on credit or saving and running your business with your debit account.

Starting a business with savings

The truth is you need money to start a business in Kenya. However, not many people can save enough money to start a business and have cash flow while at it. Most youths in Kenya live from hand to mouth, with no savings, insurances, or property.

However, if you can save enough money to start a business, more power to you, the business may be small, but you own it in its entirety. Let me explain. You start a business with KSH. 50,000. You own 100% of the business, no matter how small it is. You don’t need to make payments to a bank or other financial lenders at the end of the month. In simple terms, you own 100% of the business’s equity.

Such a power position helps you run the business as you see fit, with no overhead pressure or pressure from external people. Such businesses often grow slowly over the years as sales increase, leading to an increase in your equity.

If you decide to get investors later on in your business, you will have more bargaining power and hopefully get better investment partners.

Disadvantages of starting a business from savings

In a perfect world, starting a business in Kenya from your savings is a great idea. However, we don’t live in a perfect world.

  1. It is very difficult to grow your business due to low cash flow

  2. You may need to start very small, which often leads to no growth even after a couple of years.

  3. Your score does not grow with most lenders. This means when you do need a loan, it can be difficult to secure one.

  4. You may not have any savings left for a rainy day.

  5. You may end up using your personal bank instead of a business account.

Starting a business with a loan or financial help

In an ideal scenario, no one would like to borrow money because, in the end, you will still have to pay it back, with interest, of course. This can be scary for many Kenyan youths as some interest rates can be high. On the other hand, not many young people in Kenya have enough money to start a business from savings. Even if you do, many experts recommend borrowing instead of using your savings.

Let me put it this way. Your savings amount to KSH. 100,000. You believe this money is enough to start your business. However, what if you reach out to a bank and use the Ksh.100,000 to secure a loan of Ksh.100,000?

This may seem redundant but simply put it, with the additional Ksh.100, 000 you now have Ksh. 200,000. The best part about it is that you are not using your money but the bank’s money.

At the same time, you build the confidence the bank has with you and can access more funding later easier. You also now have more money to buy bigger assets for your business.

As opposed to giving up equity to get funding when bringing in investors, you still have full control of your business. When you decide to bring in investors, you may have less bargaining power, but on the flip side, the business may be bigger, giving you alternative bargaining chips.

Disadvantages of borrowing to start a business

  1. In most cases, it is hard to qualify for business loans for youth in Kenya

  2. Interest rates may be high and difficult to pay back

  3. You will need to have some money to show your commitment; often, it is about 20%

Final word

As you can see, both using loans or savings are viable options if you want to start a business. The most important thing is finding an option that works for you. A good approach is first to educate yourself with entrepreneurial online courses like Basics of Accounting, Analyzing my finances, Basics of Financial Planning, Early Financing for your business to be more knowledgeable on the best approach for you. You can also get a mentor with to hold your hand and help you make a better decision.