gearing

Here is a mistake many small business owners make without even noticing. A man opens a shop with ₦500,000 of his own savings, then borrows another ₦4,500,000 from a cooperative to stock up fast and look bigger than he is. Sales come in nicely for a few months, and he feels clever. Then the market slows down, the loan repayment still lands every month like clockwork, and suddenly the business that felt exciting now feels like a trap he built with his own hands.

That trap has a name in corporate finance, and it is called gearing. It simply compares how much of a company's money comes from borrowing against how much comes from the owners themselves. A company with high gearing has leaned heavily on loans and debt to fund itself. A company with low gearing has mostly used its own money or money from shareholders who bought into the business.

Gearing is not automatically bad. Borrowing to grow can be smart if the returns from that growth are bigger than the cost of the loan. The danger is that debt does not care whether business is good or bad. It still wants its instalment on the same date every month, while sales can be moody and unpredictable.

In the United Kingdom, banks and landlords look closely at a company's gearing before lending more money or signing a lease, because a heavily geared company is one bad quarter away from struggling to pay anyone. Investors ask the same question before buying shares. A person in London sending money home to help a family business in Aba should also ask how much of that business is owned outright versus how much is owed to someone else, because that tells you how shaky the ground really is.

The most useful way to think about gearing is as a measure of pressure. The higher the gearing, the more pressure sits on the business to keep performing, month after month, with very little room to breathe if things go calm.