MSME DIGEST With Kola Owolabi
“They keep saying we should leverage debt in business, but how do we do that without getting bankrupt or losing money?” (Part 1)
The first thing I usually ask is this: Are you just starting your business, or is your business already established? Your answer determines whether debt is your friend or your enemy.
If you are a first-time entrepreneur, my advice is straightforward: stay away from debt.
That may sound surprising because we often hear successful entrepreneurs talk about leveraging other people’s money to grow their businesses. While that advice is correct, it does not apply to someone who is still trying to discover whether a business idea will work.
A start-up is an experiment. At that stage, neither the entrepreneur nor the business model has been fully tested. You are still learning about your customers, pricing, operations, marketing and competition. There are simply too many uncertainties.
This is why no prudent bank executive should recommend a commercial loan to a genuine start-up. Banks are custodians of depositors’ money. Their responsibility is to lend where there is a reasonable assurance of repayment, not where the entrepreneur is still experimenting with an unproven business model.
Instead of spending valuable time chasing banks and finance houses, start with the resources already within your reach. If your available capital is small, then start small. If additional funds are required, consider bringing in a trusted partner who shares your vision and is willing to contribute equity rather than debt.
Whatever approach you adopt, let it be guided by a well-prepared business plan. A good business plan helps you determine the appropriate scale to start, the customers to target, the resources required and the growth strategy to follow. It allows your business to grow on a solid foundation rather than on borrowed money.
Once your business has demonstrated consistent market demand, developed healthy cash flow and established a record of profitability, you can then begin to consider external financing for expansion.
The history of Microsoft offers an important lesson. When Bill Gates and Paul Allen co-founded the company in 1975, they did not begin by borrowing heavily from banks. They started with the modest resources they could assemble and focused on building products that customers wanted. As revenues grew, they continuously reinvested profits into expanding the business, enabling Microsoft to become the world’s largest software company without relying on bank loans during its formative years under Bill Gates’ leadership.
That approach teaches an enduring principle: prove the business before borrowing to grow it. Debt should accelerate a successful business model, not rescue an unproven one.
Unfortunately, many aspiring entrepreneurs reverse this process. They first look for loans and only afterwards begin to figure out how the business will work. That approach often ends in frustration, loan defaults and, in many cases, business failure.
In the next edition, we shall examine the other side of the discussion: How should an already established business with proven cash flow and profitability leverage debt in Nigeria without sliding into bankruptcy?
Do you have a business question that has been bothering you? Send it via WhatsApp to the number in my byline below. Your question could be featured in a future edition of Entrepreneurs’ Frequently Asked Questions in MSME DIGEST, helping other entrepreneurs make better business decisions.
Kola Owolabi is a Fellow of the Institute of Management Consultants of Nigeria. His company, David Solomon Consulting, a foremost business plan preparation consulting firm, operates out of Igbesa, near Crawford University, Ogun State. He can be reached at 08023203198 ( WhatsApp line)
