Funding Expansion: Alternative Loan Solutions for Nigerian Companies – Ayoola Adeola

A significant challenge facing Chief Financial Officers and business owners in Nigeria is not the performance of their companies, but rather the issue of misaligned financing, where repayment of loans begins before investments have generated returns.

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This mismatch can be seen in instances where a manufacturer is given a 6-month loan to set up a production line that takes 9 months to become operational, or a logistics company is expected to repay a loan before it can fully benefit from a major contract.

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Such financing structures can have severe consequences, including compressed cash flow, premature refinancing, and slowed growth, despite the underlying business being sound.

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This is where private debt comes in, designed to address the gap by providing financing solutions tailored to the specific needs and realities of the borrower, unlike conventional bank lending with its lengthy credit processes and standardised frameworks.

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Private debt solutions have a tenor that aligns with the borrower's investment cycle and cash flow profile, with repayment tied to cash flow rather than fixed timelines, and structures built around the business's revenue generation.

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This distinction is crucial for growth-stage Nigerian businesses in capital-intensive sectors, as it determines whether financing accelerates or constrains growth, particularly for those in the "missing middle" - companies that are operationally mature and commercially viable but underserved by traditional capital providers.

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These businesses, including manufacturers, SMEs, healthcare providers, utility and infrastructure companies, and FMCG distributors, share characteristics such as established operations, tangible assets, strong growth potential, and financing requirements that often exceed conventional lending structures.

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Private debt addresses these needs through bespoke financing instruments, including structured financing, private notes, receivables and inventory financing facilities, contract-backed and offtake-linked structures, and mezzanine capital.

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The most suitable financing structure depends on factors such as the intended use of funds, cash flow visibility and stability, and the level of risk the business can absorb, highlighting the need for careful consideration in financing decisions.

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Despite available financing options, common funding mistakes persist, such as financing long-cycle projects with short-term debt, assuming foreign currency obligations without adequate hedging, and layering multiple facilities without a coordinated structure.

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These mistakes stem from financing decisions driven by capital availability rather than strategic alignment with the business's cash flow realities, underscoring the importance of borrower readiness and strategic financing decisions.

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Lenders now prioritize borrower readiness alongside business performance, seeking companies with clear use of funds, disciplined financial reporting, and a credible path to cash generation, as well as a strong promoter character and sustainable financing structure.

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As Nigerian businesses enter increasingly capital-intensive growth phases, financing decisions will play a crucial role in long-term outcomes, requiring more than just access to capital, but a financing partner that can align capital structure with business strategy.