What Prevents SMEs From Using Bonds To Raise Funds In Kenya

By Steve Biko / Published May 22, 2023 | 7:44 am




KEY POINTS

One of the biggest challenges is that SMEs and start-ups often do not have the credit history or financial stability that is required to issue bonds. Bonds are typically rated by credit rating agencies, and only companies with a high credit rating are able to issue bonds at a reasonable interest rate.


SME

KEY TAKEAWAYS


The Kenyan government has been trying to encourage SMEs and start-ups to issue bonds as a way to raise money. In 2019, the government launched the Kenya Bond Challenge, which is a competition for SMEs and start-ups to develop business plans for bond issuance.


Bonds are a type of debt instrument that can be used by businesses to raise money. They are typically issued by large companies, but they can also be issued by small businesses and start-ups. However, there are a number of factors that prevent SMEs and start-ups from using bonds to raise funds.

One of the biggest challenges is that SMEs and start-ups often do not have the credit history or financial stability that is required to issue bonds. Bonds are typically rated by credit rating agencies, and only companies with a high credit rating are able to issue bonds at a reasonable interest rate.

SMEs and start-ups often have a lower credit rating, which means that they would have to pay a higher interest rate to investors.

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Another challenge is that SMEs and start-ups often do not have the resources to issue bonds. The process of issuing bonds is complex and time-consuming, and it requires a significant amount of legal and financial expertise. SMEs and start-ups often do not have the resources to hire the necessary professionals to issue bonds.

Finally, SMEs and start-ups often do not have the need to issue bonds. Bonds are typically used by businesses to raise large amounts of money for long-term projects. SMEs and start-ups often do not need to raise large amounts of money, and they may be able to get the financing they need from other sources, such as bank loans or venture capital.

Despite these challenges, there are a number of SMEs and start-ups that have successfully issued bonds. These businesses have typically been able to overcome the challenges by having a strong credit history, a clear business plan, and a team of experienced professionals.

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Here are some examples of SMEs and start-ups that have successfully issued bonds:

  1. Airbnb

  2. Uber

  3. Spotify

  4. Tesla

  5. Square

These businesses have all been able to raise significant amounts of money through bond issuance. This has allowed them to grow their businesses and expand into new markets.

If you are an SME or start-up that is considering issuing bonds, it is important to carefully consider the challenges that you will face. However, if you are able to overcome these challenges, bond issuance can be a great way to raise money for your business.

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Here are some additional tips for SMEs and start-ups that are considering issuing bonds:

  1. Get professional advice from a lawyer or financial advisor.

  2. Make sure that you have a strong credit history.

  3. Create a clear business plan.

  4. Build a team of experienced professionals.

  5. Do your research and understand the bond market.

By following these tips, an SME can increase your chances of successfully issuing bonds and raising money for your business. Factors that SMEs need to focus on are;

  1. Credit history. Bonds are typically rated by credit rating agencies, and only companies with a high credit rating are able to issue bonds at a reasonable interest rate. SMEs and start-ups often have a lower credit rating, which means that they would have to pay a higher interest rate to investors.

  2. The process of issuing bonds is complex and time-consuming, and it requires a significant amount of legal and financial expertise. SMEs and start-ups often do not have the resources to hire the necessary professionals to issue bonds.

  3. Bonds are typically used by businesses to raise large amounts of money for long-term projects. SMEs and start-ups often do not need to raise large amounts of money, and they may be able to get the financing they need from other sources, such as bank loans or venture capital.

In addition to these challenges, SMEs and start-ups may also face challenges in marketing their bonds to investors. Investors are often more likely to invest in bonds issued by large, established companies with a proven track record. SMEs and start-ups may need to work harder to convince investors that their bonds are a good investment.

Despite these challenges, there are a number of SMEs and start-ups that have successfully issued bonds. These businesses have typically been able to overcome the challenges by having a strong credit history, a clear business plan, and a team of experienced professionals.

If you are an SME or start-up that is considering issuing bonds, it is important to carefully consider the challenges that you will face. However, if you are able to overcome these challenges, bond issuance can be a great way to raise money for your business.

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Here are some additional tips for SMEs and start-ups that are considering issuing bonds:

  1. Get professional advice from a lawyer or financial advisor.

  2. Make sure that you have a strong credit history.

  3. Create a clear business plan.

  4. Build a team of experienced professionals.

  5. Do your research and understand the bond market.

The Kenyan government has been trying to encourage SMEs and start-ups to issue bonds as a way to raise money. In 2019, the government launched the Kenya Bond Challenge, which is a competition for SMEs and start-ups to develop business plans for bond issuance. The winner of the competition receives a grant of Ksh10 million (US$100,000) to help them issue their bond.

The government has also created a number of other initiatives to support SMEs and start-ups, such as the Kenya Industrial Property Protection Act, which provides intellectual property protection for SMEs, and the Kenya Youth Enterprise Fund, which provides loans to young entrepreneurs.

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Despite these initiatives, there are still a number of challenges that prevent SMEs and start-ups from issuing bonds in Kenya. These challenges include:

  1. Lack of awareness: Many SMEs and start-ups are not aware of the benefits of issuing bonds or the process involved.

  2. Lack of access to capital: SMEs and start-ups often do not have the financial resources to issue bonds.

  3. Lack of credit history: SMEs and start-ups often do not have a credit history, which makes it difficult for them to obtain a loan from a bank.

  4. High-interest rates: The interest rates on bonds issued by SMEs and start-ups are often higher than the interest rates on bonds issued by large companies.

The government is working to address these challenges, but it will take time to make a significant impact. In the meantime, SMEs and start-ups that are considering issuing bonds should carefully consider the challenges that they will face. However, if they are able to overcome these challenges, bond issuance can be a great way to raise money for their business.

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