How to Squeeze Every Penny out of Lenders

Note: In the below article, we have used a 5-year personal loan with a monthly repayment frequency for the analysis.

James Odhiambo and his business partner Alex Kinyanjui wanted to start a transport business. They figured that two 10-ton carrier trucks would enable them to ferry goods from Nairobi to Mombasa and back again. They approached a bank recommended by a friend, which was Equity Bank. The loan would be secured by the trucks themselves.

They anticipated third party costs not related to the bank, such as government levies and insurance at Kshs. 240,000 in total between both the vehicles. Keen on getting a loan at 14%, they built their dreams based on this. They discovered that they could turn a net profit of Kshs. 10,000 downwards and Kshs. 20,000 upwards from the coast. This would yield a return of Kshs. 60,000 per two-way trip for both trucks.

The entrepreneurs wanted to drive the trucks themselves, while employing a turnboy for each vehicle. Their calculations accounted for fuel and labour only. A first-year profit without accounting for the cost of credit, would be Kshs. 6,000,000. Depreciation would be at 25% of Kshs. 10,000,000 and a miscellaneous allowance of 20% on Kshs. 6,000,000 would cover normal repairs and other expenses. Profit would therefore be watered down to Kshs. 2,300,000 by these uncrystallised expenses. Upon checking the cost of credit website, the finance cost was ascertained. A monthly payment of Kshs. 232,683 was discovered, with an interest component of Kshs. 66,015.83. Final net profit would be a healthy Kshs. 1,507,810, with the depreciation expense and savings on the other arbitrary 20% allowance going towards repayment of the asset book values.

The total amount to be repaid would therefore be Kshs. 14,510,951 with a whopping Kshs. 500,000 representing bank charges (and thus carrying 10% excise duty of Kshs. 50,000). The APR would be 16.57% and not what was initially hoped for.

Start-ups must therefore use the free tool to estimate finance costs and work on invigorating the profit-making ability of new ventures. However, there is no difference in the anticipated outflow when using an unsecured loan from the same tier one lender and this implies a predictable ability to expand by being availed working capital when needed. How easy it is to get an unsecured loan, can only be hinted at by strong bank statements.

When asking for a similar unsecured loan, Co-Operative Bank pleasantly surprised. The bank charges were only Kshs. 275,039 translating to an APR of 15.25%. However, the monthly repayment would be identical to Equity Bank as would be the case with all other banks. This is because of the ceiling on interest rates that legislation has enforced.

Diamond Trust Bank was even lower with an APR of 15% on an unsecured loan, due to very modest bank charges of Kshs. 200,000. All bank charges attract 10% excise duty and therefore this component will also be reduced with reasonable bank charges.

Ecobank, with total charges of Kshs. 330,000, represents an APR of 15.51%. Unsecured loans are not listed as one of their offerings and I would assume that they would be very hard to obtain with the regulatory disruption to the free market lending policies that we have experienced.

KCB has an APR of 15.25% while NIC has one of 16.07%, both on unsecured loans. Higher APR’s represent heftier bank charges and their corresponding excise duty. However, a secure loan of identical tenor with NIC, carries an APR of 15.51% with total charges becoming more reasonable i.e. Kshs. 446,964 vs. Kshs. 330,000

Borrowers must consider a number of factors when borrowing, apart from the charges. These include:

  1. Ability to repay from continued business income and threats to the continued profitability of the business – cautiously overstating the likely surface area of the vortex that can suck up profitability.
  2. Ability to repay from employment income – the recent mass dismissals in the banking sector that came as a result of the impending doom of decreased profitability, has forced career oriented individuals to reconsider job security
  3. Level of service provided by the chosen organisation – no point in borrowing from a lender who doesn’t give you adequate guidance and explanations
  4. Speed of processing
  5. Proximity to place of work or home, for example Nairobi traffic would prevent you from regularly making trips from Karen to Westlands, which is about 20 Kms away
  6. Relationship with staff – friendly, smiling, helpful, smart (not necessarily attractive as we are not going there to date) and knowledgeable staff at the bank will improve the chances of satisfied and productive customers
  7. Client lifecycle – the longer you have been with a bank, the better your reputation and ability to negotiate more favourable terms
  8. Flexibility – offers various products including unsecured loans, letters of credit at sight etc.

Cost is as important a factor to consider as the lender’s willingness to lend. Rafiki Microfinance, which is a microfinance institution, has some very high interest rates. Unsecured loan would require a monthly outflow of Kshs. 299,405, representing a 27.71% APR. The annual interest rate component is a whopping 26%! Its interest rates are not capped as commercial banks are. However, it is easier to attain SME finance from the company as compared to regular banks.

Learning about Guardian Bank’s extremely competitive charges, an astute investor named Polycarp Ngumbao wanted to take a secured loan. With total charges of just Kshs. 114,950 and a nominal APR of 14.52%, a plus side would be very sparingly diluted. He gave them security of Kshs. 20,000,000 worth of Safaricom shares. He therefore managed to buy Kshs. 10,000,000 more worth of the stock. Normally, banks only lend 50% of the value of a security, when dealing with shares. As the market booked gains, he was anxious to sell due to the political situation. However, to release the charge created over a security, official correspondence from the bank is required and he was fortunate to experience speedy completion of formalities and realise a net profit of Kshs. 1,000,000 within one month. However, this shows us much about a lender’s ability to speedily ‘unblock’ risky assets for resale. An uncalled delay could have seen the market price come off. Different branches have different abilities to respond to client needs. Moreover, different banks also have different policies and bureaucratic channels to follow. Sometimes customer satisfaction is superior to procedural stringency.

Getting a loan should be preceded by analysis of advantages and disadvantages and some forecasts of various future scenarios. After determination of viability, individuals should decide on what type of instrument they need. A very convenient assessment of estimates relating to various types of loans for 35 banks exists on the cost of credit website. Utilisation of this free tool can equip a borrower with vital information prior to interacting with their preferred lending institution.

@MihrThakar