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Understanding Debt: How individuals and businesses can use it responsibly

Don’t go swimming in debt. Take a moment to learn about how best to manage your personal and business debt in order to use it to your advantage.



Understanding debt, The Diderot Effect: Are you a victim? And how to beat It

Every individual and household goes through the mandatory cycle of earning and spending. The earning cycle comes with spending obligations, and the need to save. Whilst income may fluctuate, expenses do not. This is because vitals such as food must be bought, rent must be paid, and children’s tuition must be paid. This mismatch of income and expenditure can present a problem. We may have revenues, but sometimes those may not be readily available to take care of pressing expenses.

When you borrow money to meet present obligations, you are consuming future income today. The problem is that your ability to earn is not infinite. If you divide your active life into periods of months or weeks, the periods represents times during which you will incur expenses and will need corresponding income to offset that expense.


Debt present a solution to revenue shortfalls. If a household has expenses of 100 but income of 80, there is an inclination to borrow 20 to ensure that level of income can be met. However, if future revenues cannot pay off the debt incurred today, then a debt trap is created, whereby you are always paying a loan interest but never fully extinguishing the loan. That is a bad loan

So, there is good debt and bad debt?

Good debt is any debt where the interest rate charged on the borrowed cash is lower than inflation or expected investment return. A debt is also good where the repayment period is less than the expected life of the asset purchased with the debt. An example of a good debt is a mortgage loan. E.g, if you get a 18% loan for 10 years to purchase their home. That would be a good debt because the repayment period of the loan is shorter than the economic life of the asset purchased i.e. the house.

Bad debt is debt where the interest rate charged is high or where the economic life of the asset purchased by the debt is shorter than the debt repayment period. For example paying for a holiday with a credit card. The card has a high interest rate and the holiday has no economic benefit (yes it may have health benefits). Another example will be a consumer loan of say 30% for 5 years to buy an asset like a stove that has an economic life of say 3 years.

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Read Also: How will 2019 look for you as an investor?

How to use Debt responsibly

So how do you borrow responsibly? Well you calculate the cost of the loan and compare to the economic benefit from the loan. The cost of the loan is the interest rate also called the Annual Percentage Rate (APR). The economic benefit is measured by how that loan adds to your asset base or net discretionary cash flow.

In general, Debt should be used to increase your net income or your asset base. Be careful of using debt to purchase assets that depreciate faster than the loan is repaid.

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Match Interest to Income

Minimise borrowing with an interest element. Instead, seek out sources of finance that do not charge any or low interest. Examples are borrowing from family and/or cooperative societies. When you have exhausted all sources of non interest borrowing, you can then approach a bank for a loan. Now keep in mind the longer you can spread out the loan payments the better for your cash budget.

Rules for Borrowing

Know your Debt to Income Ratio DTI: It is important to determine your DTI to aid you your decision-making as regards debt. To get your DTI, simply do the following:

  1. Calculate all your monthly debt payments. .
  2. Calculate your Monthly Income
  3. Take your monthly debt payments total and divide it by your monthly income.
  4. Multiply by 100, the answer is your Debt to Income percentage

[Read Also: How to calculate interest on a money market fund investment]

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A DTI below 20% is considered very good, as you are utilizing only N20 out of every N100 earned to cover debt payments. As you DTI rises, you are considered more risky as your have less income flexibility

Be clear what you want, Lower Cost or Lower Repayments: A 6 year loan is always better than a 4 year loan in terms of cash repayment. This is because the longer the term for a loan, the lower cash repayments, even though loan costs borrower more because you make more payments in 6 than 4 years. However, a 4 year loan will have a lower interest cost that a 6 year loan.

Understand the loan; Fixed or Variable: Also ask if the interest rate charged is fixed or variable; i.e. will the rate rise if he Central Bank of Nigeria increases the Minimum Rediscount Rate MPR? Is the rate offered promotional? will it increase during life of loan? How will management fees be calculated?


How can you save money on loan? Ask about early repayments; are there penalties if you pay down early? Also ask for a schedule showing your actual principal and interest payments clearly separated, and any management fees you will be charged. How are your loan payments applied? To principal or interest? Be very clear on this.

Borrow for only income generating activities: If you are borrowing for a business, then only borrow to fund income generating assets. Do not borrow to buy the CEOs “status car”. You can, however, borrow to buy the delivery van. You buy the CEO’s car from profits the business generates…


Match Loan duration to Income: Do not borrow short term via overdraft to fund a long term project such as building a new head office. Be careful about borrowing a term loan with a fixed repayment schedule to fund a contract with the State Government where you are not sure of exact date you will be paid.

Have a payback plan B: If you want to get a mortgage for N5m and the source of repayment is your salary, how is this right? What if you lose your job? How will the loan be serviced?

Keep in in mind this simple equation: At 25% interest rate, if you borrow N100 from the bank, you will pay them back N100 in interest alone after four years. A loan from a bank caries an interest cost and is very expensive, this must be a last option. For startups, remember there are several financing sources to go before you get to loan, including grants and/or angel investor.

Last note, if you own a business, only borrow in name of the Business in order to limit your liability.



  1. David

    April 22, 2019 at 5:27 am

    This is a brilliant article. Many of us need to read & apply it in our financial lives. Thank you very much.

  2. Brian

    April 22, 2019 at 3:43 pm

    With articles like this, Nairametrics is truly living up to its name.

    Talk about financial intelligence!

    Well done, Team. Kudos.

  3. Abiodun Ogunmola

    April 23, 2019 at 6:44 am

    Very helpful article, Thanks for this initiative

  4. Fawunmi Abolade Temitope

    April 23, 2019 at 7:44 am

    Very good

  5. Malik Ali

    April 23, 2019 at 12:29 pm

    Thank you so much for this educative article. Nairametrics and the whole team is doing a great job.

  6. Adedayo lawal

    April 24, 2019 at 9:17 am

    We really need to start educating ourselves about loans. Seen people including myself making some financial missteps due to poor financial education.

  7. Anonymous

    April 27, 2019 at 8:32 am

    This is apt. .. kudos!

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What SME’s need other than Intervention loans

Since access to finance is a key constraint to SME growth, funding it has become paramount.



SME's, Here’s why your business needs a solid value proposition (PART 1)

Small and Medium Enterprises (SMEs) play a major role in most economies, particularly in developing countries. According to the World Bank, they represent about 90% of businesses and more than 50% of employment worldwide. Formal SMEs contribute up to 40% of national income (GDP) in emerging economies and these numbers are significantly higher when informal SMEs are included. The World Bank predicts that “600 million jobs will be needed by 2030 to absorb the growing global workforce, which makes SME development a high priority for many governments around the world.  

Since access to finance is a key constraint to SME growth, funding it has become paramount. This has birthed a myriad of programs ranging from incubators to accelerators both locally and internationally giving out loans, grants, and other resources to ensure that the sector is equipped to create jobs and stimulate the overall economy. There have also been federal grants and other forms of support given to SMEs. Since the outbreak of the Covid-19 pandemic, SMEs have been prioritized as recipients to loans and other stimulus packages. The CBN’s N50 billion Targeted Credit Facility (TCF) geared towards supporting SMEs and households whose economic activities have been disrupted by the COVID-19 pandemic, is just one of the different packages that have been put in place to cater specifically to it.  


Explore Economic Research Data From Nairametrics on Nairalytics

While there is data to back the impact SMEs have on our economy, it is true that even though small businesses help the economy, not all small businesses will contribute to the dream – or even survive past its early years.  According to The Better Africa report, by Weetracker, an African digital media company, the top 5 countries that experienced the highest shutdown rates among start-ups between 2010 and 2018 were Ethiopia at 75%, Rwanda at 75%, Ghana at 73.91%, Zimbabwe at 66.7%, and The Democratic Republic of the Congo (66.7%). Failure rate for start-ups in Nigeria averaged 61% over the same period. What this means is that if small business loans are being given to businesses at random in Nigeria, 61% of those businesses are bound to fail and the monies given, completely lost.  

The small business loans being offered by the CBN is a good step in the right direction. However, determining whether it ends up in the hands of the startups that are viable enough to scale and create the jobs or the larger percentage that will fail, depends to a large extent on how they are selectedIn disbursing the loans, there must be clear methods of choosing the recipients. CBN’s N50 billion Covid-19 intervention fund for SMEs in conjunction with NIRSAL Microfinance Bank, simply noted that it would appraise and conduct due diligence applications before sending them to the applications to the CBN for final approval, to CBN for review. The results will tell their story. 

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Why the economy needs more than loans 

The CBN giving out intervention loans is just one part of finding the solution – and this too does not say much about the amount in loans being given and their effect on the economy at large. If it’s too little to make any real difference, then it might only buy many of these businesses a few more months of dogged survival, after which all will be lost.  

The overall operating environment must be able to stimulate growth either through favourable tax incentives for specific industries, moratorium on other forms of loans, or just the provision of basic infrastructures like electricity and speedy internet services.  

READ ALSO: What Nigerian MSMEs must do to thrive in the new normal

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Another important thing is to ensure there is a ready market for businesses within the country. Even with the right federal loans, a business having no ready market will sink its funds into inefficient marketing. This ready market, however, has a lot to do with the ease of local production to ensure competitive pricing, further curtailing the proliferation of imported items, and more. 

In other words, economy will benefit even more from its overall development. The loans might help but, overall, there is unlikely to be sustainable exponential growth until the things that should be in place to expedite the development process exists. 

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How Nigerian SMEs can survive high mortality rate

SMEs are a very important economic catalyst in developing and industrialized countries.



More than 40 SMEs in Lagos shut down due to economic crisis

In Nigeria where unemployment is a serious issue, the local businesses have a special position in the industrial sector because it has created employment and has been able to utilise labour. The local businesses, otherwise known as SMEs which means, Small And Medium Enterprise are everywhere, found on every street and corner as they surround us.

There is however no universal definition of SMEs that is widely accepted as it differs and varies from countries, but this is usually based on employment, assets or combination of the two. Institutions and organizations define SMEs in different ways depending on the purpose and the objective. Take for example, according to Organization for Economic Co-operation and Development OECD (2005) SMEs are considered to be independent firms that employ less than a given number of employees. However, SMEs were classified in terms of size, and financial assets.


The Small and Medium Industries and Equity Investment Scheme (SMIEIs), defined SME as an enterprise with a 200 million naira maximum asset base, with the exclusion of land and working capital and with a workforce of not less than 10 employees and not more than 300 employees. Akabueze,(2002).

Explore Economic Research Data From Nairametrics on Nairalytics

The Third National Development plan of Nigeria (1975 – 1980) defined a small scale business as a manufacturing firm that employs less than ten people, or whose machinery and cost of equipment does not exceed N600,000
The Federal Government Small Scale Industry Development Plan of 1980 defined a small scale business in Nigeria as any manufacturing process or service industry, with a capital not exceeding N150, 000 in manufacturing and equipment alone.

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These definitions give a clearer explanation as to how the meaning of SMEs differs and varies. However, just to give you a clearer understanding of what local businesses or SMEs mean, they are independently owned organisations that require less capital and less workforce and less or no machinery. They are ideally suited to operate on a small scale to serve a local community and to provide profits to the business owners.

READ MORE: FG to disburse N97.3 billion to tech innovators, agric enterprises

Most enterprises in Nigeria, most of which are in the commercial sector are categorized as small businesses. The role of the small and medium enterprises towards the development of Nigeria is of great importance as it has contributed greatly to the country in terms of growth and development and also in providing employment opportunities.

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From seminars to workshop initiatives for SMEs both locally and internationally, a lot is being said about SMEs all over the World.

According to the Central Bank of Nigeria report (2003), SMEs are a very important economic catalyst in developing and industrialized countries.

According to the United Nations Industrial Development Organization (UNIDO), developing countries can conquer poverty and inequality by democratizing, deregulating, and liberalizing the integration of the global economy. Recent studies have shown that SMEs contribute to over 55% of GDP and over 65% of total employment in high-income countries also that SMEs and informal enterprises account for over 60% of GDP and over 70%of total employment in middle-income countries (OECD, 2004).

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READ ALSO: These Nigerian businesses are being affected by COVID-19

However, considering the term “small”, there’s a whole lot of enormous challenges that come with it. In Nigeria, the factors working against the development and growth of local businesses are quite numerous, some of which include:

1. The issue of funding is a major problem with SMEs in Nigeria. However, the problem is not how to source it but the accessibility to either short or long term loans.


2. Lack of infrastructural facilities is a serious impediment to the performance of SMEs. The problem of inadequate infrastructural facilities includes electricity, good road network, availability of potable water, and solid waste management. These infrastructures are left to the business owners to provide themselves.

  1. Poor Management and Low Entrepreneurial Skill Base is a serious clog in the survival of small businesses as there is a lack of essential and required expertise in business which leads to wrong and costly decisions and mismanagement.
  2. Entrepreneurs often blame their failures on inadequate sales. However, the problem lies with poor marketing skills that could help promote their sales.
  3. Most entrepreneurs go into business without proper planning by taking a realistic view of what their strengths and weaknesses are, let alone giving careful consideration and analyzing the economic trends or business conditions in that particular sector of activity, which sometimes leads to mishandling when the business starts to expand.
  4. The root of most employee problems in Nigeria is poor personnel management. They put aside personnel matters till crises set in. Such crises usually pose serious threats to the firm’s survival if they are not promptly looked into.
  5. The harsh deteriorating macroeconomic environment in Nigeria has adversely affected the performance of small business enterprises and has posed as a major challenge to their survival and growth. Most small business enterprises are struggling with the problem of uncertainty caused by the unstabilized macroeconomic environment and policy shifts.

With all of this ongoings, some of the solutions preferred to ease these challenges include:


1. The need for government, and non-governmental organizations to create Seminars and workshops initiatives and other forums, to establish a platform for the interaction of SMEs owners/managers with others which can help to improve on their management capabilities.

2. Government should also provide the necessary infrastructures in order to ease the burdens and thereby encourage and promote rural industrialization.

3. The SME owners/managers should strive to develop effective marketing strategies in order to boost business operations which will become profitable.

4. It is important for SMEs to develop good personnel management policies to avoid crises that could affect their business.

5. Local business owners should take to proper planning, realizing his strengths and weaknesses before diverting into any business to avoid mishandling.

6. Goverments should help create a macroeconomic environment that is stable as it will enable these local businesses to make reasonable forecasts on costs, turnover, and return on investment.

7. The government should help in making funds easily accessible to SME owners/managers, be it short or long term loans that could help to encourage them to execute their business plan.

8. SMEs operators should also develop their competences in managing and sustaining their businesses by constantly engaging in training, research and development.


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130 farmers to receive seed funding of N100,000 each

The target of the programme is to adopt farmers in 774 LGAs across the country.



The National Information Technology Development Agency has kick-started a job and wealth creation programme where 130 farmers will each receiv, e seed funding of N100,000Border Closure: Nigerian rice farmers are struggling to feed a rice-hungry nation. CBN to give Niger Delta rice farmers single-digit loan 

The National Information Technology Development Agency has kick-started a job and wealth creation programme where 130 farmers will each receive seed funding of N100,000. The programme will be supervised by the Federal Ministry of Communication and Digital Economy.

According to a statement from the agency, the National Adopted Village for Smart Agriculture (NAVSA) programme is in line with the government’s drive to lift 100 million Nigerians out of poverty, and it will start with 130 farmers in Jigawa state.



The target of the programme is to adopt farmers in 774 LGAs across the country, open the platform to all agriculture ecosystem players with access to information, facilitate and improve productivity, reduce the cost of production, and facilitate access to local and international markets.

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READ MORE: President Buhari directs Ministries of Power, Finance, BPE to seal Siemens deal

With all of this in place, it is expected that the farmers will be able to build sustainable business models and digital business opportunities that will create not less than 6 million well-paying jobs in the next 10 years.

“NAVSA Platform is aimed at digitalising agriculture to drive Digital Economy, as part of President Buhari’s agenda to leverage on technology and innovation to revolutionise the agriculture value chain,” the statement read.

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Among other things, the farmers will be empowered with a digital platform, smart devices (tablets), connectivity for data and calls, Digital agripreneurship skills, and enrolment with telecom operators and the National Identity Management Commission (NIMC) for identification.

All of these will be given to them at the end of the programme, which will last from July 1 to July 13, 2020.

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