Is there such a thing as good debt?

[2Lazy2P]

True.

I'll add, the key to a successful business has as much to do with a willingness to take risks as it does with hard work. Debt is simply managed risk.

I agree 100%. Just have a plan and goals when you step out on that limb...

[Catarina]

There is good debt, it took me a while to realize that, which caused me to miss out on a few good opportunities. It also put me in a bind a few times when I was first starting out because I paid cash for things, that I could have made payments on.

To me, most of the time, a business loan is kinda like a home mortage or a land loan.

Are most people not going to buy a home because they don't cant pay cash for it?

Are most people going to pass on buying a piece of land because they don't have the cash for it either?

[LiftAndShoot]

Debt that can be at once leveraged and covered is a good thing. It's important to remember that there is a technical aspect to debt (large businesses take advantage of this all the time) and it is; if you have the capability to cover the 'debt' at any point in time, you really aren't in debt, you just owe someone money. Tricky, but true.

[Kaiser14]

Good debt is basically purchasing something that shouldn't lose value (buying a house). Bad debt is basix ally something that is losing value (vehicle).

Buying a franchise can be good debt if it's profitable and/or appreciating value.

[TejasNW]

If it makes you more than it costs you...........

I like to say: The only good debt is when it is used to buy a productive asset that generates cash flow exceeding fully loaded cost (asset price+carrying cost of debt.)

Most personal debt does not do this, unless you're talking rental property.

[sniper steve]

I like to say: The only good debt is when it is used to buy a productive asset that generates cash flow exceeding fully loaded cost (asset price+carrying cost of debt.)

Most personal debt does not do this, unless you're talking rental property.

^^^This

I own the home I live in, have mortgages on all my rentals. That debt is paying itself off with almost zero effort on my end, and I will retire a millionaire.

[Atfulldraw]

You know you can actually call the guy and ask him yourself, right?

I'm not a fan of debt....and maybe I'm just not smart enough to live with debt, but I don't like it at all. Part of that is because under our system, I can go borrow way more than I can reasonably pay back -- based on my income LAST YEAR, I can go down to the local Ferrari place and buy two of them on credit tomorrow, but that doesn't make it a good idea. Now honestly....my income last year has nothing to do with my income next year, but that is the primary measure a bank will use to decide whether to give me a loan.

The big problem with listening to other people with debt is that most will overstate their income and understate their debt levels.

YOU have to figure out where YOUR confidence level is....

[Ryan C]

First, you have to understand the difference between an investment and debt. In business, debt is a necessity, for most businesses. You just can't save up and buy with cash these days, in most cases. One older business man told us, "You'll never have anything worth having unless you borrow money". My dad used to be able to save up and buy with cash. That was when new equipment cost $20K or so. Now days it costs $1.4M. Times have changed.

[TKK]

^^^This

I own the home I live in, have mortgages on all my rentals. That debt is paying itself off with almost zero effort on my end, and I will retire a millionaire.

as long as real estate stays strong - been in this area for 60 plus years - real estate, like stocks, cycles. I have lived through several real estate downturns in central texas and they are not pretty. I have witnessed a number of friends and clients who went under from real estate exposure. As soon as folks start thinking this will last forever is when they get burned.

[junkmanhunter]

I listen to Dave Ramsey daily. Yes, there is such a thing as good debt but I wouldn't consider a business loan good debt. There is nothing tangible backing the debt and if things went south with the business that "good" debt is going to turn bad real fast. Dave preaches real estate investing because you have a tangible asset that arguably will not depreciate and provides cash flow.

I don't understand this statement^^^^ Name me more than one or two businesses that didn't start out with some debt.. It isn't the debt that is bad, it's the person in charge of the debt that causes problems most of the time.

A business loan is not good debt...it is bad debt. A business is just a piece of paper filed with the state, the only tangible assets are items you use on a daily basis that would be near worthless after purchasing (ie. restaurant supplies). I assume there is no real estate with the franchise and you would just be leasing a space (additional liability). Also, don't think of bankruptcy as just a stroll in the park. It's a life changing event that many people struggle to get out from.

With this statement, I guess my business is just a piece of paper? I have some tangible assets but 90% of my business is me.

Alrighty. That has not been my experience. Had I not used borrowed money on some business deals I'd still be a working stiff.

Exactly^^^^ I guess the $50K I borrowed to help me get started was a bad debt? I paid it off in less than 2 years and fortunately haven't looked back. I have taken on some more business debt that was required to grow my business. I felt it was smarter to take on debt as opposed to using my CASH.

Like stated in other posts, it all depends on how smart you are with money and what your and your wife's risk tolerance is. If you are honest and sit down with a big chief tablet and a husky pencil, and can't get the numbers to work out, then guess what, it won't work in real life either.

[Planner]

as long as real estate stays strong - been in this area for 60 plus years - real estate, like stocks, cycles. I have lived through several real estate downturns in central texas and they are not pretty. I have witnessed a number of friends and clients who went under from real estate exposure. As soon as folks start thinking this will last forever is when they get burned.

Yup. This.


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[RiverRat1]

If you can make money on borrowed money and make money by investing your cash and putting it to work for you somewhere else, I would say that is good debt, but your talking about consumer debt it seems and likely you aren't going to make more than the apr of credit cards.
Countless financial advisors and wealth management guys disagree with Dave's investment strategies, so keep that in my mind as well.

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Of course financial advisors disagree. They would love for everyone to have a full loan out on their ranch so they can "invest" all their money. And yes this "should" work most of the time. But when/if the markets crash you could lose everything.

[Jerry Worley]

True.

I'll add, the key to a successful business has as much to do with a willingness to take risks as it does with hard work. Debt is simply managed risk.

Very well said. Been self employed for 27 years now. No risk, no reward. That being said, it sure is nice being debt free from your business as soon as possible.

[Christianhuff]

Yes, during the era of free money, I used $160k worth of revolving credit to by and remodel 9 houses and never paid more than 2% interest over that 10 or so years. Most of the time I paid no interest at all. So yes, I would say that was good debt. But since I had the assets to cover the debt, I didn't really consider it debt. I was just leveraging assets to purchase more assets.

[Burnadell]

A business loan is not good debt...it is bad debt. A business is just a piece of paper filed with the state, the only tangible assets are items you use on a daily basis that would be near worthless after purchasing (ie. restaurant supplies). I assume there is no real estate with the franchise and you would just be leasing a space (additional liability). Also, don't think of bankruptcy as just a stroll in the park. It's a life changing event that many people struggle to get out from.

It is clear that there is a lot you don't understand about various types of businesses and finance.

Of course financial advisors disagree. They would love for everyone to have a full loan out on their ranch so they can "invest" all their money. And yes this "should" work most of the time. But when/if the markets crash you could lose everything.

You are wrong about your blanket assumption and must be dealing with the wrong advisor(s).