Borrowing money in Uganda is about to get more expensive. The Bank of Uganda has raised its Central Bank Rate (CBR) from 9.75 to 12 per cent, and commercial banks are now raising what they charge on loans. Absa moves its shilling prime lending rate from 19.5 to 21.75 per cent from November 1. Stanbic will follow from December 1, and DFCU is going from 20 to 22 per cent. Other banks may do the same.
If you run a business, this is not just talk about monetary policy. It means bigger monthly repayments, pricier working capital and, possibly, smaller profits. Small and medium-sized businesses (SMEs) feel it most, because many have little savings to fall back on and very tight cash flow.
Why loans are getting costlier
On October 14, the central bank raised the CBR by 2.25 percentage points. It had three main worries: prices rising faster, higher global energy costs, and a shilling that keeps losing value.
These three are connected. When the shilling weakens, imports cost more, including fuel, machinery and raw materials. Soon those higher costs show up in shop prices. By raising interest rates, the central bank hopes to slow price increases, support the shilling and stop a short-term jump in prices from becoming a lasting one.
But there is a trade-off. Higher rates also make it more expensive for businesses to buy stock, buy equipment or pay salaries. The central bank has lowered its growth forecast and warned that inflation could average 7 to 7.5 per cent over the next 12 months. Uganda has to bring inflation down without choking the investment and jobs the economy needs.
Who feels it most
Not everyone is hit equally. Large companies usually have profits set aside, shareholder money, foreign funding and the power to negotiate with banks. Small businesses often rely on overdrafts and short-term loans to buy stock and pay suppliers.
Think of a trader restocking a shop, or a contractor who finished a government job and is still waiting months to be paid. For them, higher interest can quickly eat up thin profit margins.
Some of the damage is hard to see. A second shop is never opened. A machine is not bought. A new worker is not hired. Add these decisions up and the whole private sector slows down, along with investment and jobs.
Businesses cannot change monetary policy. What they can do is adjust quickly. Here are five practical steps.
What business owners can do
- Talk to your bank early
First, understand your current own loan. Is the rate fixed or variable? Is it tied to the bank’s prime rate? When can the bank change it? Then speak to your relationship manager about a longer repayment period, restructuring the loan, or switching to a fixed rate.
Do not assume every CBR increase will be passed on in full or straight away. Banks also look at their own funding costs, the risk of borrowers not paying, available cash and competition from other lenders. So negotiate instead of accepting the first new rate you are given. Compare offers from other regulated lenders, including SACCOs and microfinance institutions, and look beyond the headline rate to fees, collateral and the total cost of the loan.
Most important, go to your bank before you miss a payment. Bring realistic cash-flow projections and be honest about what you can afford.
- Protect your cash flow
A business can look profitable on paper and still struggle if customers pay late while salaries, rent and suppliers need to be paid on time. If you give customers 60 days to pay, you are in effect lending them money. When you are borrowing at 22 per cent yourself, that gets expensive fast.
Check your payment terms and follow up on unpaid invoices regularly. Consider small discounts for customers who pay early and think carefully about those who always pay late. If you supply government, keep your paperwork in order and keep following up. On the spending side, negotiate better terms with suppliers and avoid locking up cash in stock that sells slowly. The aim is to shorten the gap between spending money and getting it back from sales.
- Borrow only with a clear purpose
Not all debt is equal. Good debt helps you earn more. Bad debt just delays your problems.
Before borrowing, ask yourself: will this money buy equipment that increases output, stock that sells quickly, or growth backed by real demand? Or will it simply cover regular losses? If it is the second, think again. Look at other options, such as profits you have kept in the business, supplier credit or partnerships with investors. Small businesses can also team up to buy in bulk or share transport costs. Every loan should have a clear business purpose, a realistic repayment plan and a way of earning a return.
- Watch exchange rate risk and review your prices
If you depend on imports, you are especially exposed. When your costs are in dollars but your customers pay in shillings, a falling shilling can squeeze your margins quickly. Look for reliable local suppliers and avoid depending on a single source. Do not borrow in foreign currency unless you also earn in that currency.
Review your prices too. You cannot absorb every rise in fuel, transport, materials and loan costs forever. Raise prices gradually and explain why to your customers. Selling below cost just to keep customers is not sustainable.
- Be careful with expansion and keep good records
Before going ahead with any project, test it against higher interest rates, weaker demand and rising costs. If it only works when credit is cheap, it may be wiser to wait. Put your money into things that raise productivity, cut costs or bring in cash soon.
Also keep your records in order: accounts, bank statements, tax records, invoices and digital transaction histories. Good records will not guarantee cheaper loans, but banks trust businesses whose finances they can understand, and that helps when you negotiate.
Government and banks must do their part
Businesses should not carry the whole burden. The government must stop delaying payments to suppliers and contractors. When it pays late, businesses are forced to borrow to cover money the state already owes them. The government should also be careful with its own borrowing. If banks find government securities more attractive than business loans, private firms get squeezed out of credit.
Banks, for their part, should judge small businesses on more than collateral. Cash-flow information, digital transaction histories and credit information systems can help them tell a sound business from a truly risky one.
The real test starts now
The days of fairly cheap credit may be ending. In the tougher period ahead, poor cash management, too much borrowing and badly planned expansion will be hard to survive.
The businesses that come through will not necessarily be the biggest. They will be the ones that know their numbers, protect their cash, manage their risks and invest only where the returns are realistic.
By Nathan Were
Mr. Were is a financial inclusion specialist based in South Africa.
Email: [email protected]
