Borrowing at 30%+: When Does a Business Loan Stop Creating Value and Start Destroying It?

Nigerian manufacturers paid an average 32.1% interest rate on bank borrowing in 2025, according to data from the Manufacturers Association of Nigeria (MAN). That was an improvement from 35.6% in 2024, but every major manufacturing sector surveyed still recorded an average borrowing rate above 30%.

At that price, borrowing is no longer merely a financing decision.

It is a capital-allocation test.

Consider a business offered a ₦500 million facility at approximately 32% per annum. The headline interest alone is about ₦160 million a year, before arrangement fees, management fees, legal costs, other facility charges and the economic effect of how and when interest is paid.

Before management asks, “Will the bank give us ₦500 million?”, there is a more important question:

What exactly will this ₦500 million earn?

A bank's willingness to lend does not prove that borrowing will create value. It proves that the bank is willing to take the credit risk, usually on terms designed to protect the bank. Whether the transaction creates value for the borrower is an entirely different question.

Nigeria's Cost-of-Capital Problem Is Real

The current financing environment did not arise in isolation. Nigeria has experienced an aggressive monetary-tightening cycle as the Central Bank of Nigeria sought to contain inflation and restore monetary and foreign-exchange stability.

As at September 2026, the CBN's Monetary Policy Rate stands at 26.5%. The Cash Reserve Requirement for deposit money banks is 45%. Commercial borrowing rates are consequently much higher.

MAN's latest data illustrates the pressure clearly. Manufacturers paid an average borrowing rate of 32.1% in 2025, compared with 35.6% in 2024. The average was 32.5% in the first half of 2025 and 31.8% in the second half.

Nigeria therefore has a genuine financing problem. Businesses are justified in asking for a financial system capable of supplying productive enterprises with affordable, appropriately structured long-term capital.

When money becomes expensive, capital-allocation discipline becomes more important, not less.

Management cannot control the Monetary Policy Rate. It can control what it borrows, what it borrows for, what return it demands from the investment and whether the resulting cash flow can service the debt.

The Wrong Question: “Can We Repay the Loan?”

Many borrowing decisions begin with this question: Can we afford the monthly repayment?

That matters. But it is not enough. A company can successfully repay a loan and still destroy shareholder value by taking it.

The real questions are: What is the true effective cost of the facility? What incremental return will the borrowed capital generate? How quickly will that return become cash? Is the return comfortably above the relevant hurdle rate? What happens if revenue falls, margins compress, customers pay late, interest rates reset upward, the naira depreciates or the project is delayed? And after compensating lenders and accepting all those risks, what remains for shareholders?

A 32% Loan Does Not Merely Require a 32% Gross Margin

Suppose a company borrows ₦500 million at 32% and management says: “Our gross margin is 40%, so we can afford the loan.” Not necessarily.

Gross margin is not return on invested capital.

That margin may still have to absorb salaries, electricity and diesel, logistics, rent, repairs and maintenance, insurance, administrative overhead, bad debts, depreciation, taxes, additional working capital and financing costs.

A company can therefore have a 40% gross margin and still earn a return on incremental capital far below its financing cost. Borrowing decisions should not be justified by turnover or gross margin. The relevant question is what incremental economic return and cash flow the additional capital will generate.

First, Know What the Money Really Costs

A facility described as “30% per annum” may economically cost more than 30%. Consider a ₦500 million facility with 30% interest, a 1% management fee, a 1% arrangement fee, 0.5% legal/documentation costs and 0.5% other compulsory facility costs.

Headline interest is ₦150 million. Additional charges in this simplified illustration amount to ₦15 million. If some charges are deducted upfront, the company may receive less than ₦500 million in usable cash while its obligations are still calculated by reference to the full facility.

Payment timing matters too. A facility requiring interest monthly is economically different from one where equivalent interest is settled much later.

What is the effective annual cost of the money we will actually have available to deploy?

IFRS 9's effective-interest methodology reflects the same underlying principle in financial reporting: directly attributable transaction costs and fees integral to a financial liability are incorporated into its effective interest rate. The label attached to a charge does not change its economic effect.

The ₦500 Million Test: Where Does Value Destruction Begin?

Assume, purely for illustration, that a company can borrow ₦500 million at a pre-tax effective financing cost of 34%. That represents approximately ₦170 million of annual financing cost.

Note: This simplified illustration compares pre-tax operating return on incremental capital against the pre-tax effective financing cost. Tax effects are considered separately. It is a financing-screening illustration, not a substitute for a full investment appraisal.

Cost of Debt Is Not the Whole Hurdle Rate

The table above deliberately provides a simple financing screen. A proper investment appraisal goes further.

A business is normally financed by both lenders and shareholders. Lenders require interest; shareholders also require compensation for committing capital and bearing risk. The relevant hurdle therefore is not automatically the bank's interest rate.

Management should consider the company's blended cost of capital, often expressed as its weighted average cost of capital, as well as the specific risk of the proposed investment. A high-risk expansion should ordinarily require a higher expected return than a low-risk investment.

Clearing the bank's interest rate is not necessarily the same thing as creating shareholder value.

Growth Does Not Automatically Create Value

Suppose a company borrows another ₦500 million for expansion. Revenue rises. Assets increase. Production increases. Staff numbers grow. Market share improves.

But suppose the additional ₦500 million earns only 24% while the effective financing cost is 34%. The expansion produces approximately ₦120 million of operating return against approximately ₦170 million of financing cost.

The company has grown, but the incremental economics are negative.

Growth creates value only when the return generated by additional capital adequately exceeds the cost of that capital after considering risk.

A business can grow itself into financial distress. Size is not value.

Capital Velocity Changes the Equation

A high borrowing rate does not automatically make every borrowing decision irrational. Consider one business borrowing to acquire an asset that will not produce meaningful cash for three years and another borrowing working capital that turns every two months. Their economics are completely different.

Suppose, purely illustratively, that ₦100 million produces a genuine 10% net operating return per 60-day cycle and the entire capital plus return can immediately be reinvested. Six perfectly repeated cycles compounded mathematically would produce (1.10)⁶ − 1, or approximately 77% annual return.

Real businesses rarely achieve perfect reinvestment. There may be idle periods, bad debts, inventory losses, taxes, operating leakage and changes in margins.

When capital is expensive, how quickly it turns can be as important as the margin it earns.

The Cash Conversion Cycle Becomes Critical

For working-capital borrowing, management should understand the cash conversion cycle: Inventory Days + Receivable Days − Payable Days.

Suppose inventory sits for 90 days, customers take another 90 days to pay, and suppliers provide only 30 days' credit. Cash is effectively tied up for approximately 150 days. At borrowing costs above 30%, that delay is expensive.

Before taking another facility, management should ask whether cash can first be released by reducing inventory days, accelerating collections, renegotiating supplier terms, requiring customer deposits, eliminating slow-moving stock, improving procurement planning, tightening credit policies or disposing of idle assets.

Sometimes the cheapest financing available is cash already trapped inside the business.

Do Not Use Short-Term Expensive Money to Finance Long-Term Illiquid Assets

Financing construction of a factory with a 12-month overdraft at more than 30% can create a maturity mismatch if the factory will not generate meaningful cash for two years.

Management may assume the bank will renew the facility. Perhaps. But if the bank changes its risk appetite, reduces the limit, asks for additional collateral or refuses renewal, a viable long-term investment can become a liquidity crisis.

Refinancing hope is not a financing strategy.

As far as practicable, financing tenor should reflect the cash-generation profile of the asset being financed.

Do Not Borrow to Finance a Broken Business Model

There is a major difference between temporary liquidity pressure in a fundamentally profitable business and borrowing because the underlying business cannot generate sufficient cash.

Debt can bridge timing. Debt cannot permanently cure bad economics.

If a company repeatedly borrows to fund salaries, rent, routine supplier payments, old interest, overdue taxes or recurring operating deficits, management should determine whether the problem is genuinely liquidity or whether the underlying business model requires restructuring.

Interest Coverage: How Much Room for Error Do You Have?

One useful measure is the interest coverage ratio: EBIT divided by Finance Cost.

Suppose EBIT is ₦300 million and annual finance costs are ₦100 million. Interest coverage is 3.0 times. If finance costs rise to ₦180 million, coverage falls to 1.67 times.

There is no universal safe ratio for every company. Industry stability, debt structure, cash conversion and operating risk matter. But the closer operating earnings move toward finance cost, the smaller management's margin for error becomes.

Banks Are Repaid With Cash, Not Accounting Profit

A profitable company can default because profit is not cash. A company can report substantial profits while cash remains trapped in trade receivables, inventory, contract assets, retention balances or other working-capital items.

Management therefore needs to examine debt-service coverage: whether cash available for debt service can comfortably cover both interest and principal payments.

For businesses carrying significant short-term debt, a rolling 13-week cash-flow forecast can be particularly valuable.

The income statement may say the company is profitable. The cash-flow forecast tells you whether the bank gets paid on Tuesday.

Stress-Test the Loan Before Reality Does It for You

Borrowing decisions should never rely only on management's expected case. At minimum, model a base case, a downside case and a severe-but-plausible case.

In the downside case, test lower revenue, lower gross margin, slower collections, higher energy costs, adverse FX movements and higher interest rates. In the severe-but-plausible case, combine several adverse assumptions.

If the company cannot still service interest and principal without selling strategic assets or taking another emergency loan, it may be betting its liquidity on management's forecast being right.

Foreign-Currency Debt: Cheap Interest Can Become Expensive Money

A dollar facility may carry a lower nominal interest rate than a naira facility. That does not necessarily make it cheaper.

If revenue is predominantly in naira while debt service is denominated in dollars, naira depreciation can increase both the naira cost of interest and the naira value of principal outstanding.

A company earning natural dollar revenues is differently positioned. Borrowing in foreign currency merely because the coupon appears attractive can turn a financing decision into a currency bet.

The Tax Shield Helps — But It Cannot Rescue Bad Economics

There are two different “30%” concepts in this discussion, and they should not be confused. A bank loan priced above 30% per annum is a financing-cost issue. The 30%-of-EBITDA interest limitation under the Nigeria Tax Act is a separate tax rule dealing with connected-person debt; it is not a general cap on the deductibility of ordinary bank interest merely because the bank charges more than 30%.

Subject to applicable statutory conditions, interest incurred on debt employed in generating business income may be deductible in determining taxable profit.

Under the Nigeria Tax Act 2025, the connected-person debt rules restrict relevant deductible interest broadly to 30% of EBITDA, with excess qualifying interest capable of being carried forward for up to five years. The current regime also extends the scope to local connected parties; relevant connected-party debt can include certain third-party debt guaranteed by a connected person.

But management should resist the argument: “Interest is tax deductible, therefore the loan is cheap.” A tax deduction may reduce part of the burden. It does not turn a poor investment into a good one.

Accounting Treatment Does Not Change Cash Economics

IAS 23 requires borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset to form part of the cost of that asset. Other borrowing costs are generally recognised as expenses.

That treatment affects when and where borrowing costs are recognised in the financial statements. It does not make the interest disappear.

Capitalising borrowing costs does not make the bank cheaper. Cash still leaves the business.

“Inflation Will Make the Loan Cheaper” Can Be Dangerous Thinking

There is economic logic behind real interest rates. But an operating business cannot stop the analysis there.

Inflation benefits a borrower only to the extent that revenues and cash flows adjust sufficiently relative to financing and operating costs. If raw-material prices, wages, energy costs, logistics and working-capital requirements rise faster than selling prices and collections, nominal growth can coexist with deteriorating real profitability.

The bank is not repaid with economic theory. It is repaid with cash.

Variable Rates: Small Percentages Become Big Naira

On ₦1 billion of borrowing, one percentage point equals ₦10 million per year. A three-percentage-point increase means approximately ₦30 million of additional annual interest.

Management should know whether the rate is fixed or floating, what triggers repricing, how frequently repricing occurs, whether the lender can change its margin, what default interest applies and what other charges can vary.

Personal Guarantees Change the Risk Calculation

Many SME and mid-market facilities require directors or shareholders to provide personal guarantees, personal property as collateral, corporate and personal undertakings or other forms of additional security.

That changes the risk calculation. A failed expansion may no longer affect only the company's balance sheet. It can threaten assets accumulated by the entrepreneur outside the business.

The bank's downside may be protected. Yours may not be.

Before signing a personal guarantee for expensive corporate debt, an owner should understand not only the expected upside but the realistic personal downside.

Collateral Has an Opportunity Cost

Even when a facility succeeds, collateral is not free. If a company pledges its best property to finance a mediocre project, that property may no longer be available to support a future opportunity offering significantly better returns.

Debt can therefore consume financial flexibility as well as cash. Boards should ask what opportunities may be foreclosed by using their strongest collateral and borrowing capacity today.

A Loan Approval Is Not an Investment Appraisal

Some entrepreneurs interpret bank approval as validation of the underlying investment. It is not.

The lender principally wants to know: “Will we get our money back with interest?” The shareholder should be asking: “After paying the lender and accepting the risk, what value remains for us?”

A bank may be comfortable because it holds collateral, guarantees, debentures, insurance, domiciliation of proceeds, financial covenants and other security. Its credit committee has assessed whether lending makes sense for the bank. That is not the same as determining whether borrowing makes sense for you.

Never outsource your investment decision to your lender.

The Joe Adinma & Co. Debt Decision Test

Before signing a significant facility, management and the board should be able to answer ten questions:

1. What is the true effective cost? Include interest, fees, compulsory charges and payment timing.

2. Exactly what will the money finance? “Working capital” is not enough. Identify the inventory, receivable, contract, asset or project.

3. What incremental economic return and cash flow will it generate? Not turnover. Not gross margin. Incremental return and cash.

4. Does that return comfortably clear the appropriate hurdle rate? Merely matching the bank's rate is not enough.

5. How quickly does the investment convert back into cash? Capital velocity matters.

6. What happens in the downside case? Stress-test sales, margins, collections, FX, interest rates and operating costs.

7. Can cash be released internally before new debt is raised? Examine inventory, receivables, supplier terms and idle assets.

8. Can operating cash flow service both interest and principal? Do not rely solely on accounting profit.

9. What collateral, guarantees and financial flexibility are being surrendered? Include the owner's personal exposure where relevant.

10. What is the exit plan? Every facility should have a credible repayment source other than “the bank will renew it.”

If management cannot answer these questions convincingly, the company may not yet be ready to borrow.

When Saying “No” to a Loan Is Financial Strength

There is sometimes a perception that securing a large bank facility is evidence of business success. It may demonstrate creditworthiness. That is not the same as value creation.

A financially disciplined company should be prepared to reject debt when the price is excessive, expected returns are inadequate, the margin of safety is too small, the cash conversion cycle is too long, the tenor is inappropriate, the downside threatens survival or management cannot demonstrate a credible source of repayment.

Sometimes the best financing decision is: Do not borrow yet.

Instead, consider collecting receivables faster, reducing inventory, renegotiating supplier credit, securing customer advances, disposing of idle assets, bringing in equity, phasing the project, leasing rather than buying, seeking appropriately priced development finance or postponing the investment.

Waiting can be frustrating. Destroying capital is worse.

The Hard Truth About 30%+ Money

Nigeria needs affordable credit. Businesses cannot industrialise indefinitely from retained earnings. Factories need long-term financing. SMEs need working capital. Companies need funding for technology, exports, productivity and expansion.

The private sector is therefore justified in demanding a financial environment in which productive businesses can obtain appropriately structured capital at sustainable rates.

But while businesses wait for financing conditions to improve, management must allocate capital using the rates that exist — not the rates it wishes existed.

At borrowing costs above 30%, slow receivables become expensive. Excess inventory becomes expensive. Idle assets become expensive. Poor project execution becomes expensive. Weak forecasting becomes expensive. Low-margin growth becomes expensive. Management mistakes become expensive.

High interest rates expose something deeper than the cost of banking: they expose the quality of management's capital-allocation decisions.

Before You Sign the Facility Letter

Before approving that ₦100 million, ₦500 million or ₦5 billion facility, put the bank's offer aside.

Build the model. Calculate the effective financing cost. Forecast the cash flows. Calculate the return on incremental capital. Consider the appropriate hurdle rate. Measure interest coverage. Measure debt-service capacity. Examine the cash conversion cycle. Stress-test the assumptions. Understand the collateral. Understand the personal guarantees. Model the downside. Consider the alternatives.

After paying more than 30% for this money and accepting the risks that come with it, is enough economic value left for the people who actually own the business?

If management cannot answer that question with numbers, it should not answer the bank with a signature.

Final Thought

Debt is not inherently bad. Expensive debt is not automatically bad. A well-structured facility funding a high-return, fast-cycling opportunity can create substantial value.

But debt whose risk-adjusted economic return does not adequately exceed the appropriate cost of capital can destroy value. And at borrowing rates above 30%, there is very little room for lazy analysis.

The question should no longer begin with: “How much will the bank give us?” It should begin with: “What can this money earn — and how certain are we that the cash will arrive before the debt has to be paid?”

Because the purpose of borrowing is not to become bigger. It is to create value.

And sometimes the most financially intelligent answer to an approved loan is simply: No.

How Joe Adinma & Co. Can Help

Significant borrowing decisions should be supported by more than optimistic projections.

Joe Adinma & Co. works with businesses to evaluate the financial implications of major decisions, including cash-flow forecasting, working-capital analysis, financial modelling, debt-service capacity, investment appraisal and broader financial-reporting and advisory considerations.

An independent financial review before a major financing commitment can help management understand not only whether the business can obtain the money, but whether taking it is likely to create sustainable economic value.

About the Author

Joe Adinma, FCA, FCTI, is the Managing Partner of Joe Adinma & Co. (Chartered Accountants). He advises businesses on financial reporting, audit, taxation, governance, financial management and strategic financial decision-making.

Disclaimer: This article is intended for general information and educational purposes and does not constitute investment, tax, legal or financing advice. Financing and investment decisions should be evaluated based on the specific circumstances, cash flows, risks, tax position and contractual terms applicable to each business.

Selected Sources and Technical References

• • Central Bank of Nigeria, Monetary Policy Decisions — July 20–21, 2026: MPR retained at 26.5%; CRR for deposit money banks retained at 45%. https://www.cbn.gov.ng/MonetaryPolicy/decisions.html

• • Manufacturers Association of Nigeria (MAN), 2025 lending-rate data, as widely reported in the Nigerian business press, 2 September 2026: average manufacturing borrowing rate 32.1% in 2025, versus 35.6% in 2024; H1 2025 average 32.5%, H2 2025 average 31.8%.

• • PwC Nigeria, Worldwide Tax Summaries — Nigeria: Corporate – Deductions (accessed September 2026): connected-party interest deductibility restricted to 30% of EBITDA, including local and foreign debt guaranteed implicitly or explicitly, with excess interest carry-forward for up to five years. https://taxsummaries.pwc.com/nigeria/corporate/deductions

• • IFRS Foundation, IAS 23 Borrowing Costs: directly attributable borrowing costs on qualifying assets form part of the cost of the asset; other borrowing costs are expensed. https://www.ifrs.org/issued-standards/list-of-standards/ias-23-borrowing-costs/

• • IFRS Foundation, IFRS 9 Financial Instruments: directly attributable transaction costs and integral fees are reflected in initial measurement/effective-interest mechanics for relevant financial liabilities. https://www.ifrs.org/issued-standards/list-of-standards/ifrs-9-financial-instruments/