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So in starting a business, you can finance your operations with debt or/and equity. Both have advantages and disadvantages.
Debt means you pay interest, equity means you lose sole control. In many business a combination of debt and equity is used. There are financial instruments called Preference Shares that combine the features of debt and equity.
Debt: can your business afford to make the interest payments on time? Your interest payments are always separated from your principal payments, if you don’t pay interest, the default interest charges are added to the debt and it balloons, creating negative compounding.
Your biz must be able to pay the interest payments from the sales income that flow to the Gross Earnings, not from other extraordinary events such as selling an asset. So if you borrow N100,000.00 at 10%, then the interest payment is N10,000. This must be paid from Gross Income.
So taking debt to invest in your business is good if it’s cheap. So where can we find “cheap” debt, first is interest free loans from our family and friend. There are also Intervention loans which are really just commercial loans subsidized by the Federal Government of Nigeria.
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