In recent years, African startups have increasingly turned to debt financing as venture capital declined. In 2021, debt made up just 6% of startup funding, climbing to 25% in 2023 before stabilizing at 18% in 2024. Debt offers a faster way to access capital without sacrificing too much equity—provided the startup is mature enough.
Why Debt and Who Should Use It?
Debt can help a growing startup meet immediate needs and maintain control by avoiding unfavorable equity deals. However, it’s not suitable for early-stage companies that lack a proven track record or the cash flow to handle repayments. Instead, once a business has established itself and is poised to scale—especially into new regions—it can consider various debt instruments such as:
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Invoice Financing: Funding provided against confirmed invoices or contracts.
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Term Loans: Set amounts with scheduled principal and interest repayments.
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Working Capital Loans: For covering immediate cash flow gaps.
High interest rates in Nigeria mean startups should seek out affordable or concessionary funding options.
Assessing Debt Readiness and Creditworthiness
Financial institutions, including development finance institutions and banks offering blended concessionary funds, typically require:
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At least three years of audited financial records,
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Updated management accounts,
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Recent bank statements, and
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Proof of consistent revenue growth.
Lenders also review a startup’s credit history and overall market potential. Founders must ensure financial records are accurate and reliable—a common stumbling block is poor bookkeeping or flawed audit reports.
Potential Pitfalls and Negotiations
Founders often overlook the fine print in loan agreements. Key risks include:
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Turnover Covenants: Agreements that require meeting specific revenue targets or risk the loan being recalled.
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Hidden fees and clauses that can emerge if the startup’s financial performance falters.
While some negotiation is possible—especially around interest rates linked to the prevailing Monetary Policy Rate—there are limits given the competitive nature of funding and inherent risk.
When and How to Involve Legal Counsel
Debt financing is best suited for startups that have found product-market fit and are ready to scale. In such cases, involving legal experts early in the process is advised to navigate regulatory requirements and complex contractual terms.
Handling Repayment Challenges
In cases where repayment becomes difficult, most financing houses have relationship managers who work closely with startups to mitigate issues before they escalate. A thorough initial financial analysis typically reduces the risk of repayment failures.
Overall, while debt financing offers a strategic tool for scaling Nigerian startups, it requires careful assessment, a solid financial foundation, and proactive management of risks and contractual commitments.
