Borrowing at 30%+: When Does a Business Loan Stop Creating Value?

A Nigerian business borrows ₦500 million at 32% per annum. Interest alone, on the full principal for a year, comes to about ₦160 million — before fees, legal costs, insurance or monitoring charges.

The question that matters is not whether the company can make the repayments. It is whether the activity financed by that ₦500 million can generate enough cash, quickly enough, to leave the business better off after the lender has been paid.

The interest rate tells you what the lender expects to earn. It does not tell you what your business will earn.

That distinction is the whole article.

Why Money Is This Expensive

At its 306th meeting (20–21 July 2026), the CBN's Monetary Policy Committee retained the Monetary Policy Rate at 26.5% — unchanged since a 50-basis-point cut in February 2026, and held again in May and July. The Cash Reserve Requirement for deposit money banks stayed at 45%.

But the MPR is a policy benchmark, not a lending rate. A bank still prices the specific borrower — funding cost, tenor, collateral, credit risk, leverage, sector risk and its own required margin. That is why two companies asking for the same ₦500 million facility can be quoted very different terms, and why a 30%+ quote is not, by itself, a reason to walk away.

The next MPC meeting is scheduled for 21–22 September 2026 (307th meeting) — worth watching, but not something to build a financing decision around.

Credit Approval Is Not Investment Appraisal

A bank asks: are we comfortable this borrower can repay us?

Management must ask a different question: will this debt create value for the business after its true cost, timing and risk?

Those are separate tests. A loan can clear the bank's underwriting and still be the wrong decision for the company.

The true cost is rarely the headline rate. It includes:

• interest on the amount actually outstanding, and the timing of repayments

• arrangement, management and commitment fees

• legal, documentation, valuation and perfection costs

• insurance, monitoring and bank charges

• the cost of maintaining required balances or other facility conditions

• the financial effect of slower customer collections or a longer project cycle

Once those are added up, the real comparison is: expected incremental cash return versus all-in financing cost plus an adequate margin for risk — not "project margin versus the number on the facility letter."

Here is where boards get caught out. Suppose the true all-in cost works out to 33%, and the investment is projected to return 34%. That one-point spread is not a margin of safety — it is almost no cushion at all against a slow quarter, a delayed customer or a cost overrun. Clearing the cost of capital is not the test. Clearing it by enough to absorb the risk is.

A Worked Example

Take a ₦500 million facility at 32% p.a., used for nine months, with a 2% upfront fee.

That looks comfortable — until you stress it:

*Three extra months of interest on ₦500m at 32% ≈ ₦40m, added to the ₦130m base burden.

The base case survives comfortably. The combined downside case leaves almost nothing. The lesson isn't that this loan is good or bad — it's that management needs to know where the breaking point sits before signing, not after.

The same numbers give you the Debt Service Coverage Ratio:

DSCR = Cash available for debt service ÷ Required debt service = ₦230m ÷ ₦130m ≈ 1.77x

A base-case DSCR is not enough on its own. Ask what happens if revenue is 10% lower, costs are 10% higher, or the largest customer pays 60 days late — the scenario table above already shows you.

Four Reasons Businesses Borrow

• Productive debt — finances an asset or contract expected to return comfortably above the cost of capital.

• Working-capital debt — finances inventory or receivables that convert reliably back to cash; timing of collection is everything.

• Defensive debt — bridges a genuinely temporary disruption with a credible path back to normal cash generation.

• Destructive debt — repeatedly finances structural losses, overdue obligations or previous expensive borrowing, without fixing the underlying problem.

Destructive debt rarely announces itself. Each new facility solves today's cash shortage while making tomorrow's fixed obligations larger. Unless the underlying economics improve, refinancing only postpones the reckoning.

It also hides behind growth. Double the ₦500 million facility above to ₦1 billion at the same 32% terms, and the financing burden roughly doubles too — but if the additional capital only replicates the same ₦230 million contribution rather than scaling it, the surplus per naira borrowed falls even as revenue and headline profit rise. A business can grow its top line, grow its accounting profit, and still be destroying value if the extra capital isn't earning its keep.

Warning Signs Debt Has Turned Destructive

• New borrowing is regularly needed just to service old borrowing

• Interest expense is rising faster than operating profit

• Receivables and inventory keep absorbing more borrowed funds without faster cash conversion

• A single late-paying customer threatens payroll, tax or loan obligations

• Management's focus has shifted to “will the bank renew this?” rather than “does this still make economic sense?”

Tax Deductibility Is a Separate Question — Answer It Second

Do not approve borrowing because “the interest is tax deductible.” A deduction reduces part of the cost; it does not turn a weak investment into a good one. Determine the commercial case first, then model the tax consequences.

Under the Nigeria Tax Act 2025, interest is deductible under Section 20(1)(a) — but that deduction is expressly “subject to the provisions of the Third Schedule,” which now extends the interest deductibility limitation from foreign connected-party debt to all connected-party debt: capped at 30% of EBITDA, with unutilised interest carried forward for up to five years. For intercompany or shareholder-financed facilities in particular, this is no longer a background consideration; it directly affects the deductible portion of the interest you've just calculated as your “true cost.” Get NRS-compliant tax advice on the specific facility before relying on any assumed shield.

Seven Questions Before Signing

• What is the true, all-in effective cost — fees and conditions included, not just the headline rate?

• What exactly will the money finance?

• What incremental cash return will that use of funds generate?

• How quickly does the money return as cash?

• Does operating cash flow service the debt comfortably — what is the DSCR?

• Does the transaction survive a reasonable downside case, tested alone and combined?

• What is the cost of not borrowing — the contract, market share or investment forgone?

If a board or CFO cannot answer these seven in one concise paper — purpose, all-in cost, expected cash return, repayment source, base-case DSCR, downside scenarios and the consequence of not borrowing — the business does not yet understand the borrowing well enough to approve it. That single paper is the test. If it cannot be written clearly, the facility should not be signed yet.

The Principle, Restated

Whether debt costs 35%, 20% or 10%, the question is the same: does the capital create an adequate risk-adjusted return, after its true cost and the time needed to convert that return into cash?

A loan should finance value creation. Once a business borrows merely to sustain activities that cannot earn their cost of capital, debt has stopped being a tool for growth and become a mechanism for value destruction.

About the Author

Joe Adinma, FCA, FCTI, is the Managing Partner of Joe Adinma & Co. (Chartered Accountants), Port Harcourt. His professional interests include IFRS financial reporting, audit and assurance, forensic accounting, and Federal tax compliance under the Nigeria Tax Act 2025.

Sources

Central Bank of Nigeria, Monetary Policy Decisions (304th–306th MPC meetings, Feb–Jul 2026) and MPC Meeting Calendar (307th meeting, Sep 2026); CBN Monetary Policy framework; Nigeria Tax Act 2025 (Official Gazette No. 117, Vol. 112, 26 June 2025), Section 20(1)(a) and Third Schedule.

This article is for general information only and does not constitute financial, tax or investment advice. Actual financing decisions require analysis of the specific facility agreement, repayment profile, fees, taxes, security, covenants and the borrower's circumstances. Speak to your advisers before acting on any of the illustrations above.