Jackie Zach
October 25, 2024
Mike McKay and Jackie Zach share key insights on managing business debt, highlighting how to leverage good debt for growth and avoid bad debt traps. They explain that good debt typically involves investments that generate income, such as buying equipment or hiring staff to enhance business efficiency. Bad debt, on the other hand, often covers non-essential expenses like vacations or unnecessary purchases. Mike emphasizes that many business owners face bad debt early on, often due to inexperience, but it’s important to develop a strategy to eliminate it as quickly as possible.
The conversation also touches on how leveraging “other people’s money” (OPM) can be an effective way to fund business growth. Mike and Jackie use examples like property ownership to illustrate how good debt can create long-term equity, while renting may limit wealth-building potential. They caution against making impulsive financial decisions, such as purchasing luxury vehicles based on tax incentives, as these can lead to bad debt. Ultimately, they encourage business owners to make calculated decisions that maximize opportunities for growth and long-term success.
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Podcast Transcript:
Mike McKay: Welcome back to the Tough Love for Business podcast! I’m Mike McKay, co-hosting with Jackie Zach, who’s currently hiking. Howdy, Jackie!
Jackie Zach: Hi! How are you?
Mike: I’m great! What’s new with you?
Jackie: Awesome! What’s up with you?
Mike: I’m doing well. I’ve found it interesting to discuss money in the last couple of episodes, especially since it can be a significant source of stress for many people. I’m looking forward to talking about good versus bad debt today.
Jackie: Excellent! Last time, we discussed how fast growth requires cash, and we touched on some of the mental blocks people have regarding money. Now, let’s dive into the difference between good debt and bad debt.
Mike: Sure! What do you think that difference is?
Jackie: Well, good debt typically involves investments that will help generate more income, like buying equipment to improve efficiency or hiring staff to increase revenue. On the other hand, bad debt is often for covering everyday expenses or funding previous vacations.
Mike: Let’s think of debt as OPM—other people’s money. Many business owners only consider borrowing from banks, but there are various ways to acquire funds. If you have “bad debt,” your first priority should be figuring out a plan to get out of it quickly. Most business owners face some form of bad debt at some point, often due to risky decisions made before they have enough experience to assess the situation accurately. For instance, a sudden drop in sales might lead a business owner to think the downturn is temporary, believing they can manage their debts while working to regain stability.
Good debt, however, is about growth. Grant Cardone, a well-known sales trainer and real estate investor, advises using active income to invest in real estate. He argues that it’s not wise to think you can solely finance real estate purchases on your own; instead, consider pooling resources with investors. His success highlights the importance of leveraging funds wisely. He’s mentioned that the only property he purchased with his own money was his first one, despite now being worth billions—all his investments are shared with others.
Good debt can also refer to necessary investments, like that piece of equipment we discussed earlier. If it only needs to generate income for eight hours a month, but there’s a backlog of work, the equipment can easily pay for itself and still yield profit.
I tend to be quite risk-tolerant, so I see good debt as investing in the next marketing position or program. Some might classify these as bad debts because they seem like ongoing expenses. But hiring decisions are critical; clients often hear that hiring is a firing decision. It’s essential to clarify what you expect from a new hire and to have the resolve to let them go within 30 days if they’re not meeting expectations.
Consider leasing versus purchasing a facility. Many business owners don’t mind renting but feel anxious about borrowing substantial sums to buy property. They often overlook that renting means they’re contributing to someone else’s wealth rather than investing in their own equity. Property typically appreciates over time, making it a potentially valuable asset.
Jackie: Exactly! With rent, you don’t really have anything to show for it.
Mike: Right! You’re effectively helping someone else meet their revenue goals while you remain at a disadvantage.
Jackie: You become the other person in terms of “other people’s money.”
Mike: Absolutely! The fear surrounding debt can be overwhelming. Many people can’t fathom owing someone $2 million, but they forget that they also own something valued at $2.1 million. Over time, the debt decreases, and the asset’s value rises, creating equity.
Jackie: Exactly! Conversely, bad debt might involve purchasing vehicles that are larger than necessary simply because you want them.
Mike: Right. Or making decisions based on tax advice that encourages buying an expensive truck. Your truck won’t keep you warm at night, but having an extra $80,000 in savings might help you sleep better. It’s often tempting to buy a new truck every couple of years without considering the long-term costs. Properties, on the other hand, tend to appreciate over time, even if there are short-term fluctuations.
So, when you lease property, you’re not just avoiding debt; you’re essentially entering into a long-term financial obligation that only benefits the landlord.
You might already have bad debt that hinders your wealth-building potential.
Jackie: Exactly! It’s vital for business owners to differentiate between good and bad debt. As professional business owners, you need to evaluate your financial decisions carefully. So, go out there and make the most of your opportunities!