Why debt financing matters to a first-time founder
Borrowing lets founders retain ownership and can match a long-lived purchase with payments over time. However, repayments, interest, covenants and security apply regardless of business performance. Choosing too much debt can turn a temporary sales shortfall into default or insolvency.
Examples of debt financing
A profitable company borrows ₦150 million for production equipment, repayable over four years at 7% interest. The equipment expands capacity without issuing shares, but monthly repayments enter the cash forecast. The founder tests whether payments remain affordable if sales run 25% below plan.
Common misunderstanding
It is not free money and it is not always cheaper than equity. The stated interest rate may exclude arrangement fees, guarantees, security and restrictive terms. Unlike an equity investor, a lender normally expects contractual repayment rather than sharing the full upside and downside.
When to use it
Use it for a defined purpose when cash generation can support the payment schedule with a sensible buffer. Compare total cost, term, security, covenants and personal guarantees across offers. Avoid debt finance when repayment depends on an untested assumption or merely delays an unresolved cash shortfall.