Debt used to fund consumption, such as buying a new TV, is not a good use of debt. However, debt used to buy an income-producing asset such as a rental property, where the interest on the debt is less than the income derived from the principal invested, is considered a good use of debt. We call this latter form of debt “Leverage”. When we leverage we are essentially getting paid a return for assuming some level of additional risk. The same can be said of business.
If a business borrows money and uses the money to invest in upgrading its facility to produce a new product line, or invests the principle to develop a new service offering, the result is an increase in the asset value of the business and is a good use of debt.
Looking at your own business, how much debt is good debt vs. bad debt?
