Debt is Good: Only for Investing & Business Though

   

When business and investment people are asked, what sort of criteria to make a investment or a business is an ideal one. One of the item high on the list is that the investment or business should not used their hard earn money. In other words: taking other people money (OPM) or having a debt.

On separate article (Debt Is Bad: Insight From Franklin and Gandhi), I have explained why having a debt is not really a good thing, especially if the debt is used for acquaring any kind of lifestyle product.  So, what is the different now, why suddenly debt become a good thing to have ?

Business and Investment is to Make More Money

The main purpose people doing business or investment is to produce profit.  If it’s not for producing profit, it’s more suitable to call the business or investment a hobby or charity. So, when you’re running a business or doing an investment, you take the money from debt and make it work to make more money. The debt become productive and creating profit. On the contrary, if you take a debt just to buy a plasma TV, then it’s just for your pleasure or pride, you’re not making any more money with that debt. So the debt become consumptive (only for consumption).

Hence, taking debt to do a business is definetely better than taking debt for funding your lifestyle. OK, now the next question you need to ask. But isn’t it better to fund your business within your means ? (No need to take debt?)

Business and Investment Need Leverage To Survive and Keep Making Money

The answer is no, in business and investment, to keep making money, they have to be able to compete with other business or investment. The one with leverage will dominate the market and the losing party have to go out from the market or leverage themselve in order to survive.

For example: since you’re only have $10,000. But you want to do business say opening a restaurant without taking a debt. Well, still can be done. The problem is the guy next door have $100,000 and he wants to open the same kind of restaurant. Providing bot you and that guy have the same skill, who do you think that more likely to survive longer? Of course the one with higher budget. Why? Because they can have more promotion/marketing, hire more staff or better staff, survive longer if the market is not so great, etc, etc…

So, in this example, you can take a business loan and have the same $100,000 as capital. Do you think now you have better chance to beat the competitor?  You bet !

It’s true that having a leverage also means increasing risk and every risk have to be mitigated. But this is another subject matter beyond this article. In short by taking a debt (hence leverage) a business/investment need to take extra effort to take care of the additional risk.

It’s all about ROI (Return of Investment)

At the end all of this business and investment are judged by their return of investment. A business with higher ROI is more successful than the one with lower ROI. By taking a debt, you will maximize your ROI and can expand your business/investment further with the debt.

For example: Say that restaurant on previous example, give you $20,000 income for every $100,000 capital (20% ROI). So the guy next door who has $100,000, then will have $120,000 at the end of the year.

But you, who only have $10,000 (but taking further debt of $90k – and say the interest is $1000 a month) will also have $120,000. Subtract this with $90k loan and $12k interest ($1000 monthly), you will have total $18,000. Your total real ROI is ($18,000/$10,000) x 100% or 180%.

And to show you the importance of leverage: that guy next door can use leverage as well and get his $1,000,000 ($900,000 debt plus $100,000 own money) to leverage his business. Now, your business will be in problem !

The Interest Become Cost of Business

If the interest you pay for personal lifestyle debt is a waste (no added value cost), the interest paid for business/investment is a legit cost of business. Tax Deduction most likely will apply to this interest (check your taxation rule). So, not only the debt can significantly enhanced the business/investment, but the interest paid also receive a benefit.

Conclusion

Taking a debt for business / investment purposes is significantly different compare to taking debt for your personal lifestyle purposes. By taking debt, the business/investment is leveraged to get it’s maximum potential. In fact, this is the driving force of economy, when the business grows, the economy grows. That’s the reason the government will stimulate economy by making it easier and cheaper for business/investment to take business/investment loan.

Related Posts

• Debt Is Bad: Insight From Franklin and Gandhi
• Inflation Is NOT Price Goes Up: Common Misconception
• Kiyosaki: “Savers are Losers” – A Sad Truth with a Catch
• Credit History: An Important Document You Can’t Deny
• In Debt & Loan World: Cash Flow Is The Most Important

Denis Kristanda  

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