A lender offers your company a dollar loan at 10% a year. Another offers a naira loan at 28%.
The dollar loan looks attractive. The interest rate is much lower, and the savings could help finance expansion.
But if your customers pay you in naira, the comparison is incomplete. You earn naira, but you must find dollars to repay the loan. Before approving the facility, management and the board need to understand how much naira the business could need to meet its dollar obligations.
How a 10% loan becomes much more expensive
Consider a hypothetical Nigerian company that needs ₦1.5 billion for expansion. It has two options:
- Borrow ₦1.5 billion at 28%.
- Borrow $1 million at 10%, with an initial exchange rate of ₦1,500 to the dollar.
Assume both loans run for one year, with principal and interest repaid at maturity. Ignore fees, taxes and hedging costs for this illustration.
The naira loan requires repayment of ₦1.92 billion. The dollar loan requires repayment of $1.1 million. What the dollar loan costs in naira depends on the exchange rate when repayment falls due.
| Exchange rate at repayment | Naira needed to repay $1.1 million | Cost above the original ₦1.5 billion |
|---|---|---|
| ₦1,500/$ | ₦1.650 billion | ₦150 million, or 10% |
| ₦1,650/$ | ₦1.815 billion | ₦315 million, or 21% |
| ₦1,800/$ | ₦1.980 billion | ₦480 million, or 32% |
| ₦2,000/$ | ₦2.200 billion | ₦700 million, or 46.7% |
At ₦1,800 to the dollar, the dollar loan requires ₦60 million more to repay than the naira loan. In this example, the two loans cost the same at about ₦1,745 to the dollar. An increase of roughly 16.4% in the naira price of a dollar removes the dollar loan’s initial cost advantage.
A lower coupon is only one part of the decision.
The pressure can arrive from several directions
A company borrowing in dollars may also import equipment, raw materials or spare parts. If the naira weakens, it could face three problems together:
- More naira is needed to service the loan.
- Imported operating costs increase.
- Customers struggle to absorb higher selling prices.
The business may raise prices. But higher prices can reduce sales volumes, delay collections or push customers toward cheaper alternatives.
This is why management must test how much customers can absorb, how quickly prices can change and how long collections will take.
When dollar borrowing can make sense
Dollar debt can be appropriate where a company has dependable dollar cash flows. An exporter receiving dollars may be able to use those receipts to service dollar debt. This provides a natural hedge because the business earns the currency it owes.
Management must still examine the dollars left after paying dollar operating costs. Gross export revenue alone does not establish repayment capacity.
Timing also matters. A company expecting dollar receipts in December could still face a cash shortage if its loan payment falls due in September. Export customers may pay late, orders may decline, and receipts may belong to a different group entity.
Dollar borrowing may also make sense where the company can secure suitable financial protection, such as a forward contract or currency swap. The comparison should include the cost and terms of that protection.
The objective is to establish a dependable source of repayment in the required currency.
Buying imported equipment does not settle the question
A company may argue that dollar borrowing is appropriate because the equipment supplier must be paid in dollars. That explains the purchase currency. It does not establish the repayment currency.
If the equipment produces goods sold locally in naira, future debt service still depends on converting naira into dollars.
Management should assess the cash flows the asset will generate throughout the loan period. It should also compare naira funding used to purchase the equipment, supplier credit and a fully hedged dollar facility. The comparison must cover the complete financing arrangement.
Five questions before the board approves
- Where will the repayment dollars come from? Identify the source, expected amount and collection dates. Separate contracted receipts from hoped for export sales.
- What is the complete cost? Include interest, arrangement fees, conversion costs, hedging costs, security requirements and any floating rate exposure.
- What happens under a weaker naira? Test several exchange rates alongside lower sales, higher operating costs and slower customer payments.
- Does the repayment schedule fit the business? A factory that takes two years to reach meaningful production needs financing that reflects that timetable.
- How will management obtain the currency when payment is due? Confirm the banking process, documentation, timing and backup funding before signing.
What the CFO should present
The board should receive a comparison of the available facilities showing:
- Total repayment obligations.
- The currency and timing of available cash.
- Protection against exchange rate movements.
- Cash requirements under adverse scenarios.
- Minimum liquidity and covenant headroom.
Where dollar debt remains partly unprotected, the board should understand the size of that exposure and why the company can afford it. Management should monitor it throughout the facility’s life.
The decision does not require a perfect exchange rate forecast. It requires a financing structure the business can sustain if its assumptions prove wrong.
If your revenue is in naira, dollar debt needs a clear repayment strategy. A cheaper headline interest rate is not enough.
All numerical examples and rates in this article are hypothetical illustrations, not current loan offers or exchange rate forecasts.