SMEs turn to trade finance as unpaid government bills squeeze cash flow

Small and medium-sized enterprises (SMEs) are increasingly turning to structured trade finance to stay afloat as delayed government payments continue to strain cash flow and disrupt business operations.

Latest data from the Controller of Budget shows that outstanding public pending bills rose to Sh465.87 billion as of March 2026, up from Sh421.6 billion recorded during the same period in 2025, representing a 10.5 percent increase.

The growing backlog of unpaid bills has left suppliers and contractors waiting between 30 and 90 days, and in many cases even longer, to receive payments from ministries, state corporations and county governments.

Economists say the delayed payments are depriving businesses of much-needed working capital, forcing many firms to rely on costly short-term borrowing to meet operational expenses and keep their businesses running.

Julius Ouma, Chief Executive Officer of Faulu Microfinance Bank, said although the National Treasury recently approved the release of Sh255 billion to reduce pending bills, small businesses still require quicker and more predictable payment systems.

“While the National Treasury recently approved a Sh255 billion disbursement to chip away at the arrears, small businesses still require faster, more transparent settlements to scale,” Ouma said.

The National Treasury estimates that clearing the historical backlog of pending bills could take at least two financial years, prompting financial institutions to introduce alternative financing solutions to bridge the cash flow gap.

Faulu Microfinance Bank, backed by Old Mutual, has expanded its trade finance products to support SMEs affected by delayed government payments and supply chain financing challenges.

According to Ouma, Kenya’s estimated 7.4 million micro, small and medium enterprises contribute nearly 40 percent of the country’s Gross Domestic Product (GDP) but many struggle to access loans from commercial banks because they lack traditional forms of collateral.

To address the challenge, Faulu has adopted a risk-sharing lending model by partnering with insurance underwriters instead of relying solely on conventional collateral-based lending.

The bank has also structured financing around different stages of the business trade cycle through its Biashara SME product, offering tailored financial solutions to businesses.

Among the products offered are Local Purchase Order (LPO) financing and invoice financing, which allow businesses with confirmed purchase orders or unpaid invoices to access working capital before receiving payment from their clients.

The lender also provides bid bonds, performance bonds and advance payment guarantees with reduced security requirements, enabling SMEs to participate in multiple tenders without tying up their working capital.