Reader’s Corner – Using Debt To Grow Your Business

2nd post in the Reader’s Corner section. Write about anything that interests you and send it in to and you might get featured here on a Friday. Today’s Post is by Dipo Adetuyi, who runs Oakleaf Pharmaceuticals. His company can be found here on the web


Many businesses around the world don’t reach the 5year mark; many more don’t even reach the 2year mark. If you are a new business or an entrepreneur struggling with keeping your business afloat amidst mounting bills and relentless competition then I’m sure the concept of debt may be a bit scary to you.

Many business gurus will tell you that you that the main reason why businesses fail is a lack of funds or a trickling cash flow. Cash flow is basically the amount, frequency and manner in which cash flows in and out of your business. This means the amount of credit and debit accrued to your business over a period of time, usually one month.

Understanding the nature of your business cash flow is a prerequisite to success. You need to know how your business operates and the amount of money you expect to realise in one week, one year and even daily. Of course there are days when these figures will be over or below your estimated amount but there should be a figure and this figure can only be gotten from experience. This means you take a microscopic look at your business over a period of time and assess how cash flows in and out. I recommend a period of at least 8-10months so that you get a full grasp about the capacity of your business.

When you have a proper knowledge of your cash flow, then we can talk about debt. Debt is an obligation owed by one party (the debtor) to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor. Note that the definition doesn’t just connote debt as cash owed, it says assets as well.

As a business, there are many ways to have access to debt, the most common however is a loan. Many banks in Nigeria will charge you an interest rate of about 25% per annum, so for instance if you collect a loan of N1M (one million naira) you will pay N1, 250,000(one million two hundred and fifty naira in return) which will be spread over a period of 12 months in most cases so you will end up paying N104,116 (One hundred and four thousand one hundred and sixteen naira) monthly, that’s if the tenor of your loan is one year. There’ll also be other fees that the bank will charge, which will be taken upfront from the amount you get when you receive credit into your account.

Other methods include credit facilities from your suppliers, asking your customers to pay upfront, securing investment from angel investors, selling equity of your business, credit cards, over draft facilities etc.  The basic tenet of this concept is to use other people’s money to grow your business.

Now let’s consider the example given above, now you owe the bank N104, 116 monthly. For this to work you need to understand and consider your business mark-up and your monthly turnover. Consider that you already owe the bank 25% so you need to have a positive mark-up after 25%. For instance if you sell laptops and your mark-up is 33% and you have a turnover of N500,000 in one month then it will be extremely difficult for you to apply for a loan at 25%. This is because at a turnover of N500, 000 your gross profit is just N124, 060. You have to pay the bank N104, 116 out of this amount excluding other bills you have to pay. I must say you will have sleepless nights over this and your business will definitely not survive.

In my experience it’s better to either have a higher mark-up or a larger turnover even if it means reducing your prices slightly so you can sell a higher volume, in the end it will pay off. Now the concept of debt when fully understood and harnessed helps you in tremendous ways. Using the same example above if you have been able to negotiate a deal with your supplier to give you N500, 000 credit for 2 weeks and you also have access to a loan of N1m. This puts less stress on your business because you still have your own N500, 000 which you would have erstwhile used in making purchases. Lets now say you use the N500, 000 to purchase laptops from another supplier this means you have N1, 000,000 worth of laptops. Let’s now say you reduce your mark-up to 30% so that you can sell more. This means you will make a gross profit of N300, 000 in one month. Consider that you haven’t even touched your loan money. With whatever money you make in 2 weeks you repay your supplier and everyone is happy. After a couple of months you can decide to increase your credit limit from the supplier. If you did use the loan of N1m, you should have a turnover of above N2m.

Debt is not a bad thing, its debt management and a poor understanding of it that makes things difficult. Another great way of utilizing debt is the barter system. I know many people are reading this with a smirk. After all, the barter system is dead; truth is it isn’t. Let’s say our laptop seller also sells mobile phones or say he is a distributor for a mobile phone manufacturer hence he gets cheaper prices.  He can, if his supplier also sells mobile phones, reach an agreement with his supplier to offset his bills by supplying mobile phones instead of cash. I do this in my business and it works for me, a skill I learnt from semi-literate people.

There are so many aspects to using debt to grow your business that cannot be fully exhausted in this article but I must say that it’s something that must be embraced. It also helps to have other sources of income to cushion the effect of failure in one aspect of your business. I must however re-iterate that debt is a double edged sword; it takes skill and experience to master it. All business decisions must be made with a clear head and remember growth should be stepwise and not instantaneous.  Never be in a hurry to grow, enjoy the process and learn from it. Scraping and squeezing to pay bills and offset debts is part of the business process and it’s something that must be mastered.

There are a few things to know before getting that loan or going into purposeful debt;

1) Your cash flow must be positive and you must always underestimate it to account for fluctuations

2) Nothing ever goes as planned in business so always have a backup for your backup. You should know that your bank or supplier will not accept excuses but you should  put your monthly repayments as priority

3) Never use debt for non-business activities. Now the bank has given you the loan you have prayed for, it’s not the time to buy a new car or marry a new wife or splurge on that new bag, always plough every penny into the business and you can use its dividends on yourself. Never eat the seed, always wait for the fruits.

4) You must be disciplined; financial discipline especially in this part of the world is extremely poor especially for new businesses. Remember the concept of delayed gratification is very important.

5) Don’t be scared, worry and fear can overwhelm you and make you lose focus; if at the 14th day you don’t have any means of paying your debt then you may need to reduce the prices of some of your goods so you can have cash to repay.

6) You need to take cognisance of other factors that affect your cash flow; your overhead costs should be at a minimal. Remember the Pareto principle, 80% of your profits will come from 20% of your efforts or customers so focus on those 20%.

7) Understand your debt before going into it, you should ensure that you understand and embrace all the facts of your debts before you go into it. Don’t accept a debt you don’t fully understand, read in between the lines. If you don’t understand ask a professional.

You should know that even though most businesses always want to have their account in blue, a little red doesn’t hurt as long as it’s managed and there are ways to repay.

If you have any questions about this article please send me an email @


16 thoughts on “Reader’s Corner – Using Debt To Grow Your Business

  1. I most def will send u a mail o! Cos this is one of my major challenges. I’m scared stiff of loans!!! But I knw I nid it.

  2. I believe the ‘using other peopple’s money to groow ur buiness principle’ Is a smart business strategy if you understand how to run dat system. Thank you Mr Dipo.
    @ TL I like the fact that this forum is dynamic, its love today n finance the next! You’re really something you know! TL noni!!

  3. …..Debt management system! Nice piece if d sales/market of ur goods goes as projected..if it doesn’t with all d compounding interest on ur running loan? Hmmmmmm!

  4. …..Debt management system! Nice piece! if d sales/market of ur goods goes as projected..if it doesn’t even after bringing down d price of d goods for more sales with all d compounding interest on ur running loan? Hmmmmmm!

  5. Very great post. I simply stumbled upon your blog and wanted to say that I have truly loved surfing around your blog posts. In any case I’ll be subscribing for your feed and I hope you write once more soon!

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s