In recent years, more African startups have turned to debt financing, even as venture capital investments decline. Debt accounted for just 6% of total startup funding in 2021, but that figure rose to 25% in 2023 before settling at 18% in 2024.
For many startups, debt offers a faster route to capital, helping them meet immediate business objectives. More significantly, it allows them to avoid raising equity at unfavourable valuations or taking on excessive dilution, ultimately positioning both founders and investors for stronger exits when opportunities arise.
Yet despite its growing appeal, debt financing isn’t suitable for every startup. In this conversation with Techpoint Africa, Patrick Igwe, Fintech Business Officer at FSDH Merchant Bank, discusses what makes a startup a good candidate for debt financing and highlights key risks lenders watch for.
As of 2025, debt funding for Nigerian startups is gradually maturing but remains a relatively small and cautious part of the overall funding landscape.
1. Equity Still Dominates, But Debt is Growing
- Venture capital (VC) and equity funding have historically dominated startup financing in Nigeria.
- However, debt funding — including venture debt, revenue-based financing, and bank loans — is growing slowly, driven by:
- The need for non-dilutive capital.
- Increasing maturity of startups with recurring revenue.
- Growing interest from local and international debt funds.
🏦 2. Key Players in Debt Funding
Several debt-focused investors and institutions are active or emerging in Nigeria:
- Local banks and microfinance institutions offer loans but often at high interest rates (20%–30%) and demand collateral.
- Development finance institutions (DFIs) like the African Development Bank, IFC, and BOI are involved, often with lower-cost capital.
- Venture debt providers, such as:
- Chapel Hill Denham
- Tugende
- TCM Capital
- Global fintech lenders (e.g. Lendable, Symbiotics) are also showing interest, especially in lending to fintechs and asset-light businesses.
📊 3. Who Is Getting Debt?
Debt funding is mostly accessible to startups with:
- Predictable cash flows (e.g., fintech, mobility, asset financing).
- Tangible assets or inventory (e.g., logistics, agritech).
- Revenue-generating models with growth-stage traction.
Debt is less available for:
- Early-stage startups with no revenue.
- Highly speculative or R&D-heavy tech.
⚠️ 4. Challenges
Debt funding in Nigeria comes with several constraints:
- High interest rates: Local macroeconomic instability and high inflation drive expensive debt.
- Currency risk: Foreign-currency debt can become a burden due to Naira devaluation.
- Limited credit infrastructure: Lack of reliable credit scoring systems and enforcement.
- Short tenures: Most loans are short-term, which isn’t ideal for startups with long growth curves.
✅ 5. Opportunities and Outlook
Despite these challenges, the outlook is cautiously optimistic:
- Fintechs are leading the way in accessing debt.
- New financial products like revenue-based financing and invoice factoring are gaining traction.
- There is a push toward building local credit funds and blended finance mechanisms (mixing grants, debt, and equity).
Expect debt funding to:
- Grow in sectors with steady revenues (e.g. solar energy, healthtech, edtech).
- Become more sophisticated with tailored instruments.
- Be supported by regulatory improvements (like Nigeria’s open banking and digital lending frameworks).
Key Characteristics of Businesses Suitable for Debt Funding
1. Asset Ownership or Collateral
- Businesses that own tangible assets (e.g., vehicles, equipment, inventory, or property) are more attractive to lenders.
- These assets can be used as collateral, reducing the lender’s risk and improving loan terms.
2. Proven Business Model & Operational Track Record
- Lenders prefer businesses that have a validated, repeatable model with a clear customer base.
- At least 2–3 years of operational history is often preferred, even if profitability isn’t yet achieved.
3. Strong Financial Management
- Clean, audited financials and sound financial controls give lenders confidence.
- Businesses with proper accounting practices, clear cash flow forecasting, and low debt-to-equity ratios are more likely to access debt.
4. Recurring or Contractual Revenue
- Businesses with long-term contracts, subscription models, or consistent repeat customers are ideal for debt financing.
- This gives lenders predictability beyond general cash flow.
5. High Gross Margins
- Strong margins allow businesses to absorb the cost of debt (especially with high Nigerian interest rates) while maintaining profitability.
- It also signals efficient operations and pricing power.
6. Clear Use of Funds & ROI
- Lenders want clarity on how the loan will be used — for example, working capital, asset purchases, inventory financing, etc.
- The more directly the loan leads to increased revenue or cost savings, the better.
7. Regulatory Compliance & Low Legal Risk
- Startups operating in regulated sectors (e.g., fintech, health, energy) must show compliance.
- Legal or regulatory uncertainty increases risk and makes debt less attractive.
8. Strong Leadership & Governance
- A skilled, experienced leadership team with clear governance structures reduces execution risk.
- Lenders are more confident when a company has a board, reporting systems, and clear strategic plans.
9. Scalability Without Heavy Capital Burn
- Startups that can grow revenue without massive ongoing capital requirements are better suited for debt.
- Asset-light but profitable growth is ideal.
10. Low Customer Concentration Risk
- If a business relies heavily on a few key customers, it may be risky from a lender’s perspective.
- A diversified customer base reduces the chance of revenue shocks.
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