Debt is often talked about as something that is bound to negatively affect a company or at least temporarily slow its growth. As a result, people tend to avoid debt completely. This association easily leads people to believe that a business without debt is healthier than a business with debt; however, the opposite is true. When a business is able to take on and manage debt, it can become healthier altogether.
Isn’t Debt Bad?
This concept of “healthy debt” may be hard to grasp at first. You may be thinking, why would owing money be better than owing no money at all? A way to tackle this question is with an opportunistic point of view. For example, in order to start a new project, you will need to dedicate a certain amount of money towards the process behind the project. As you develop this project to the point of final production, you will continuously spend money without earning any back. This is where the “bad” connotation of debt comes from: spending money you don’t have just seems too risky. And, yes, spending excessively is not a healthy habit. However, this project’s debt must be weighed with the outcome of this project’s profit. By investing into an opportunity, your project “debt” can turn into revenue. It is crucial to remember that in order for a project to succeed and become profitable, you must first invest into it.
If your opportunity cost, what you could have earned from the opportunity, is greater than your debt plus the cost of acquiring debt, you should use the debt to leverage your business growth. You have to make the switch from the “debt” mindset to the “leverage” mindset.
What is the “Leverage” Mindset?
When handling debt, remember that this step can help propel your business forward. When starting a new construction project, ask yourself guiding questions:
- How much money do I need to dedicate to this project?
- What is the projected value of this project?
- Will the opportunity cost be greater than the cost of taking out and managing the project debt?
This is the foundation of the “leverage” mindset. By borrowing money, you can invest into the success, growth, and profitability of your project and overall business. By adapting this mindset you begin to view business as an opportunity for growth rather than as a game of constant risk-taking. Borrowing money as working capital allows you to leverage the growth of your business.