Debt can be a powerful growth accelerator or a fast track to failure, the difference lies in a business’s stage of development and the purpose of the funding. Corporate finance specialists generally view debt as strategic when deployed in ventures with proven business models, reliable cash flow, and clear expansion plans. For startups, debt preserves ownership but carries significant risks in the absence of predictable revenue.
For founders, debt offers clear advantages: full ownership retention, business credit establishment, and rapid access to capital. However, new businesses often lack collateral and consistent income, resulting in higher borrowing costs, personal guarantees, and fixed repayment obligations regardless of business performance.
This challenge is particularly acute in Nigeria. The Central Bank of Nigeria’s Monetary Policy Rate currently stands at 26.5%. Many MSMEs face commercial lending rates above 30%, while higher-risk borrowers may pay well over 40%, depending on the lender. These elevated borrowing costs can quickly erode profitability for businesses still searching for product-market fit. Compounding the challenge, formal bank loans reach only about 4% of Nigeria’s estimated 40 million micro, small and medium-sized enterprises (MSMEs), leaving a financing gap estimated at $236 billion. Unsurprisingly, 27% of these enterprises cite high interest rates as their primary barrier to accessing credit.
The equation changes for established firms with predictable revenue. At this stage, debt becomes a catalyst for expansion, funding equipment purchases, new locations, or working capital without diluting equity. When investment returns exceed borrowing costs, leverage can enhance shareholder value while allowing founders to retain control.
Yet expansion borrowing is not without risk. Excessive leverage can strain cash flow, while poorly matched repayment schedules may weaken otherwise healthy businesses. Financial advisers generally recommend matching the duration of financing to the asset being funded: long-term loans for fixed assets and short-term facilities for working capital.
A practical rule remains: every borrowed naira should generate more value than it costs to repay. Before taking on debt, entrepreneurs should ask three questions: Is demand consistent? Can cash flow comfortably service the loan? Will the expected returns exceed the cost of financing?
Ultimately, debt is neither inherently good nor bad. Used strategically, it can accelerate growth and preserve ownership. Used prematurely, it can become a financial burden. For most entrepreneurs, the distinction is straightforward: borrow to expand what already works, not to validate what has yet to prove itself.
