How businesses can navigate financing landscape amidst high interest rates

by Business Times writer
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The high cost of borrowing significantly affects many Ugandan businesses, presenting substantial challenges to their operations and growth.

High interest rates increase the expense of securing capital, complicating efforts to finance day-to-day activities, pursue expansion, and invest in new opportunities.

A substantial number of businesses depend significantly on loans from traditional banks and money lenders to fund their routine operations as well as their growth initiatives. Unfortunately, these financial institutions often impose interest rates that are considerably higher—sometimes more than double—the central bank rate set by the Bank of Uganda.

A report by the World Bank titled, “Step by Step: Let’s Solve the Finance Puzzle to Accelerate Growth and Shared Prosperity,” shows that interest rates often range between 22 and 25% of the total value of the borrowed amount.

“Depending on the duration of the loan, consumers can end up paying more than twice the value of the original amount, which prevents many businesses and households from accessing bank loans,” the report reads.

This practice places a heavy financial burden on businesses, making it costly to obtain the necessary capital for sustaining daily operations and pursuing expansion projects.

When interest rates rise, the increased cost of capital places a heavy burden on these businesses.

This financial strain squeezes profit margins, making it more difficult to sustain profitability and hindering growth prospects. Consequently, the ability of businesses to compete effectively and thrive in the market is compromised.

This issue is particularly pronounced for small and medium-sized enterprises (SMEs). These businesses often struggle more than larger corporations to secure affordable credit.

Higher borrowing costs hinder their ability to compete effectively and thrive in the marketplace since many lack the financial resilience to absorb these increased expenses.

To navigate the challenge, exploring alternative financing options can be a vital approach for businesses facing high interest rates from traditional banks and money lenders. Microfinance institutions and venture capital often provide more competitive rates and terms.

These alternative sources are particularly beneficial for small and medium-sized enterprises (SMEs) that may not meet the stringent requirements of conventional banks.

By leveraging these options, businesses can secure the necessary funding to sustain operations and pursue growth opportunities without being overburdened by excessive interest costs.

Additionally, engaging with government initiatives and programs such as the Uganda Development Bank (UDB) offers a relief of loans at lower than market rates.

Uganda Development Bank has grown into a formidable Shs 1.6 trillion bank in assets, providing affordable capital to businesses adding value to agricultural raw materials, manufacturers, as well as investors in tourism and hospitality, infrastructure, and education.

According to Finance Minister, Matia Kasaija, Government is in the process of acquiring for UDB credit lines worth Shs 1.083 trillion to lend more to wealth creators.

“During FY2024/25, the Bank will continue to provide capital to businesses involved in value addition, including promotion of innovation in the areas of science and technology. It will also support youth-led enterprises, manufacturers, and also provide working capital to exporters and those involved in import substitution. Green financing is also going to be enhanced to ensure climate adaptation and mitigation,” said Kasaija while reading the budget on Thursday at Kololo Independence grounds.

To achieve this, Government has further capitalised UDB with another Shs 55 billion.

Furthermore, small businesses can take advantage of the “Small Business Recovery Fund (SBRF) that government set up in 2021 to provide soft-loans to SMEs that had suffered financial distress during COVID-19.

Government provided Shs 100 billion to be equally matched by banks to extend credit to the target beneficiaries at 10 percent interest rate.

However, the uptake of this fund is still very low. So far, shs 18.4 billion has been disbursed, supporting 1,459 businesses.

Kasaija says government looks forward to relaxing requirements to attract more uptake.

“Next financial year, Government and Bank of Uganda are going to relax the requirements to ensure increased uptake of the SBRF to support SME growth,” he said.

Government is also implementing two programs namely; the Generating Growth Opportunities and Productivity for Women Enterprises (GROW) worth USD 217 million (Shs 824 billion); and the “Investment for Industrial Transformation and Employment (INVITE)” worth USD 210 million (Shs 800 billion).

These funds are intended to support women-owned enterprises and value addition for exports.

In the same vein, building a strong credit history is another crucial strategy for a business to navigate high interest rates. A solid credit record can significantly enhance a business’s ability to negotiate better interest rates and more favorable loan terms. Consistent, timely repayments and maintaining healthy financial statements contribute to a positive credit profile, which can be instrumental in reducing the cost of borrowing.

Experts advise business owners to stay informed about market trends and central bank policies as these are essential for strategic financial planning.

They say that understanding the economic landscape and anticipating changes in interest rates allows businesses to make more informed borrowing and investment decisions, potentially mitigating the impact of rate hikes.

Negotiating with banks for better terms is another practical step. Armed with a solid business plan and comprehensive financials, businesses can engage in discussions with their financial institutions to secure more favorable loan conditions.

Demonstrating financial stability and growth potential can lead to concessions from banks, such as lower interest rates or extended repayment terms.

By implementing these strategies, businesses can better navigate the challenges posed by high interest rates, ensuring sustained operations and continued growth.

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