Debt financing is becoming a popular alternative for African startups seeking growth capital amid a funding winter and restrictive equity funding. In 2022, African startups secured $1.5 billion in debt financing, a significant increase of 160% compared to the previous year. Debt funding appeals to startups as it provides much-needed funding without compromising ownership or control. It is seen as a cost-effective option and allows startups to cover expenses, acquire assets, and expand their operations.

Kenya emerged as a leader in debt financing, raising $608 million, followed by Egypt with $356 million and Nigeria with $252 million. Fintech and cleantech were the primary sectors attracting debt financing, with fintech startups securing $691 million and cleantech receiving $605 million.

However, African startups must carefully navigate the complexities of debt financing, considering factors such as rising global interest rates, currency depreciation concerns, and lender criteria. Being cash flow positive before seeking debt financing is advised, as well as raising debt in local currency to mitigate foreign exchange risks. Startups can also explore convertible debts, allowing them to raise debt now and convert it into equity later.

While debt financing offers opportunities, startups should be cautious about managing their debt to avoid potential defaults and cap table wipeouts. As the African tech ecosystem evolves, innovative financing models will continue to shape the continent's entrepreneurial landscape.

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