Things to consider before you borrow

By Waithaka Gatumia @PeopleDailyKe

In the early stages of the taxi business in Kenya drivers were making a killing. 

There were fewer taxis on road and a ripe market that was tired of paying exorbitant rates to the local cab guy. I remember hearing about drivers taking home over Sh200,000 a month with expectations of more.

It was a gold mine. But like all mines, once people hear how good it is, they come in droves. First, there were more drivers, then competition from new apps, then new offerings such as motorcycles and executive cars. Everyone wanted a share. 

It is still a good business and I suspect that it will continue to grow over time but it is unlikely to mean growth in pay for the driver. As we have seen, drivers and investors will make less per ride over time.

If you were fortunate enough to get in early, taking a loan for a vehicle may have worked out for you. The good daily returns could have helped pay off the loan. But you had to take the initial risk. 

At that time if you took a loan you would have needed some security as well as another source of income. This meant that even if the taxi business did not work you still had a way to repay the loan.

The next group to invest was told about the amazing returns. They looked and said, “If I take a loan and join in, with the kind of returns I see others making, I will clear my loan easily.” Shock and horror. 

As more people entered the market, returns quickly reduced and it became harder to repay the loans. Some ended up leaving the business and selling their vehicles.

The taxi business is still good. Many are still making profit from it and growing. But even they will tell you that it is harder now and margins are slim. 

Therefore, taking a loan to get into the taxi business without another source of income to help pay down the debt would not be advisable.  The thing about loans is that the payments are guaranteed whereas in business the returns are never guaranteed. 

Loans are hard to manage as a start-up. Vusi Thembekwayo, a South African businessman says that start-ups need “patient money”; loans that do not need to be paid back (grants) or loans without a timeline for repayment. The uncertainty of early-stage business is too great to support the mandatory repayments from an institution such as bank.

Should you take a loan to start a business? Some have taken loans and done just fine but from my experience, many of those who borrowed from financial institutions with strict schedules have struggled or failed. 

This applies to easy credit such as mobile loans and credit cards. If you must borrow look for patient money from family or friends, otherwise, save to start the business. Loans will help you grow once you are established.

The writer is the CEO at Centonomy Limited. Contact: talkcents@centonomy.com