Downside of restocking businesses on credit

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Businessman Amos Chege transformed a small Nakuru dairy and pastry kiosk into a thriving community enterprise by leveraging digital credit.

When unexpected surges in demand from community gatherings threatened to disrupt his cash flow, he used micro-credit facilities to bridge working capital gaps and stabilise his vital supply chain.

Four years ago, Amos Chege was a quiet but ambitious entrepreneur running a milk and pastry business in a rural village within Nakuru County.

He specialised in fresh and fermented milk—popularly known as maziwa mala—alongside everyday bread, eggs, and cakes for occasions like weddings and birthdays.

His early-morning milk deliveries, sourced from neighbouring Nyandarua County, were consistently sold out by midday, largely serving the surrounding residential estates.

 But a tragic, localised event soon changed the trajectory of his business, in what is considered. When a neighbour in his area lost a loved one working as a house help in Saudi Arabia, relatives and friends gathered for a month-long fundraising and repatriation drive.

As family and friends gathered to raise funds to repatriate her body, the demand for milk rose sharply, with the bulk of his stock going to the bereaved home during the month-long gathering. This created a new headache for his existing customers.

His supplier could not satisfy the new demand witnessed in his shop and referred him to another of his fellow suppliers. But there was another headache: The new supplier demanded cash on delivery.

Since Amos hadn’t established that trust with him, the bereaved home would pay him after three days or after a fundraiser that saw politicians and business executives being special guests. His regular supplier was paid the next day for the previous stock delivery, and this arrangement was holding on well.

The trader decided to do what most people in his position would do at such a point. He went in for credit from one of those digital credit lenders that focus on boosting businesses as long as they are furnished with records such as bookkeeping and financial statements.

Demand for milk would later peak when other families within the locality would be thrown into mourning, or a wedding in the local church would be held.

He also needed to serve village elders during their monthly chama meetings, or families that would be hosting traditional weddings known as ruracio.

What he would do was take credit as usual to meet new demand.

Unfortunately, for some reason, demand for milk suddenly dropped.

He tried to get more stock but managed meagre sales. That is when his phone rang off the hook as the creditor reminded him of his loans, which had come with crazy interest rates. More than those recommended by the Central Bank of Kenya (CBK).

Amos was forced to take another loan from another lender to pay off the existing one as he laboured to clear the new loan. At this point, the usual margins he was enjoying began disappearing and the burden became unbearable. Amos was forced to close shop and decided to try his hand at different businesses. Today, he sells art on canvas frames for wall hanging in Nairobi streets.

In Kenya, such is the story of many entrepreneurs: That while credit can help ease business operations, at times it can be the source of its downfall.

It’s not a surprise to see auctioneers sent by lenders descending on businesses and carting away stock or items that were not listed as collateral to recover the loan. That is why financial experts advise traders to exercise caution when taking credit to restock.

According to John Mathu, a personal banker, taking credit to restock may not be guided by sound financial decisions.

“Take the example where you’re restocking to profit from the market craze of the day, say where a fashion trend targeting youths is selling like hot cake and you see potential in it. You take that credit facility and order stock.

But in a short time, that craze is gone, and you’re left with dead stock and a loan to clear. Here, your financial decision was more dictated by a short-lived fashion craze than a real market demand,” he says.

Though it’s not wrong to go with trends of the time, he says it pays to study those trends well and how they’ll be impactful in a given market segment.

“Trends will always shift. And if you took that stock on credit waiting to settle with your supplier once you clear sales, be assured the latter would be at the door demanding pay before that stock sells out.”

Worst-case scenario

Even when you’re not restocking depending on craze, but to fill those shelves, bad months can see you struggling to fulfil your obligations with your suppliers. In the worst-case scenario, it can lead to bad relationships and reputational damage between the two of you.

“Here are the people who were trusting you, but you’re not able to repay on time. That relationship may shift to cash up front because trust is gone.

If they know of similar others who distribute to you on credit, they may damage your reputation with them,” he cautions.

On a positive note, he says credit helps if one is dealing with fast-moving stock. “Even on a bad month, ensure you’ve your own inventory to cushion you, say like 40 per cent of the inventory, and tap on your supplier for restocking when stock picks up.”

Overall, credit is not bad, but he notes that relying on credit could lead to issues hidden from the trader.

Their business model may not be working well, and restocking on loan may not be informed by demand. It could mean poor management or even waste or spending issues.