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?”
In the last edition, I advised first-time entrepreneurs to stay away from debt until they have proved their business model. Today, let us consider the other side of the discussion: How should an established business leverage debt without getting into trouble?
The answer is simple. Borrow only to expand a business that is already working—not to rescue one that is struggling.
A business with consistent sales, healthy cash flow and reasonable profitability has earned the right to consider external financing. At this stage, debt is no longer an experiment; it becomes a tool for accelerating growth.
Unfortunately, many entrepreneurs in Nigeria do the exact opposite. They borrow to cover losses, pay salaries, settle old debts or finance personal lifestyles. That is a dangerous path. Loans should create additional income, not merely postpone financial problems.
A useful rule is this: every naira borrowed should generate more cash than it costs to borrow it.
Suppose a manufacturer secures a loan to buy an additional production machine that doubles output and significantly increases profit. The loan is creating wealth because the new income comfortably exceeds the cost of servicing it.
The same principle applies to a transport company purchasing additional vehicles, a printing company acquiring faster equipment, or a supermarket opening another profitable outlet. The borrowed funds are tied directly to assets that generate cash.
Another important principle is to match the loan with the purpose. Long-term assets should be financed with long-term loans, while short-term working capital needs should be financed with short-term facilities. Using a six-month loan to finance a project that will not generate returns for three years is an invitation to financial distress.
Equally important is to avoid borrowing your way into excessive pressure. Your monthly loan repayments should leave enough cash for salaries, operations, maintenance and unforeseen challenges. Once debt repayments consume most of your operating cash flow, the business begins to suffocate.
This is why lenders pay close attention to cash flow. A profitable business can still fail if it cannot generate enough cash at the right time to meet its obligations.
Many successful businesses have used debt wisely. Companies such as Amazon and Starbucks have, at different stages of their growth, accessed external financing to expand operations after establishing strong market demand and predictable revenue. They borrowed to multiply success—not to create it.
That is the lesson for every entrepreneur.
Debt is neither good nor bad. It is simply a financial tool. In the hands of an experienced entrepreneur with a proven business model, it can accelerate growth. In the hands of someone still experimenting, it can become a fast track to bankruptcy.
Before signing any loan agreement, ask yourself three questions:
Has my business already proved that customers want what I sell? Can my cash flow comfortably repay this loan? Will this borrowing increase my profits more than it increases my costs?
If your answer to all three questions is yes, debt may become your growth partner. If the answer to any one of them is no, postpone the borrowing and strengthen your business first.
Remember, the purpose of debt is not to help you survive; its purpose is to help a successful business grow faster.
Do you have a business question that has been on your mind? 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 wiser business decisions.
Kola Owolabi is a Fellow of the Institute of Management Consultants of Nigeria. He is the CEO of David Solomon Consulting Limited, a Business Development consulting firm proficient in business plan and feasibility study preparation. He can be reached on 08023203198.
