Is there such a thing as good debt?

[RiverRat1]

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.
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.

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.

With 20/20 hindsight sure it was not bad. But most people don't know for sure if it will turn out good. Unfortunately most people who are positive they will make money underestimate taxes, payroll liabilities, and a slew of other costs when starting a business.

Bottom line - Business debt for a new business is a gamble. May be a calculated gamble but still a gamble.

[RiverRat1]

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


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

Don't beat me up I didn't mean all of them think that way. I've just heard some of them say you get 6-7% average returns in the market so leverage ranch/home with a 2-3% note and make 3-5% profit. Like I wasn't born yesterday LOL..

[gingib]

amazes me at some of the replies......and we wonder why so many people are always in debt!!!!!!

Car, house, CC debt are 100% bad debt

[TKK]

amazes me at some of the replies......and we wonder why so many people are always in debt!!!!!!

Car, house, CC debt are 100% bad debt

ok - so I have plenty of cash to pay for a new car out of pocket.

I got a loan at 1.5% for the car and have a guaranteed tax deferred account that earns me 3.5%. It is called arbitrage. How is that a bad thing?

Not saying it is right for everyone but there are cases that it makes good financial sense

[sniper steve]

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.

One $50k house a year for twenty years. I can eat a few years worth of investments should it come to it, right out of pocket.

And rental prices pretty much remain steady. If you're in the business of flipping houses, a downturn can ruin you. But I'm in it for the long haul renting. I understand there are always risks, nothing is 100%. It has its ups and downs, but if you can stick it out real estate pretty much always bounces back.

[TKK]

One $50k house a year for twenty years. I can eat a few years worth of investments should it come to it, right out of pocket.

And rental prices pretty much remain steady. If you're in the business of flipping houses, a downturn can ruin you. But I'm in it for the long haul renting. I understand there are always risks, nothing is 100%. It has its ups and downs, but if you can stick it out real estate pretty much always bounces back.

agree - I am not against real estate - bought and sold my share over the years - but due to lack of liquidity in it and downturns that may make you hold for some years it can have some risk component

[junkmanhunter]

With 20/20 hindsight sure it was not bad. But most people don't know for sure if it will turn out good. Unfortunately most people who are positive they will make money underestimate taxes, payroll liabilities, and a slew of other costs when starting a business.

Bottom line - Business debt for a new business is a gamble. May be a calculated gamble but still a gamble.

Agreed. Didn't say it wasn't a gamble, just a necessary evil to get started.

Another example of what I call not a bad business debt. I have the cash to buy and pay for a new truck for my business. Instead of taking a chunk of my available cash and paying for the truck, I put 50% down and financial ed the balance over 24 months at 3% interest. I can earn that plus more with the truck out working now and still have cash available for a true emergency if needed. JMO I know there will be people who don't agree and that's fine, there's more than one way to get it done.

[JeffJ]

Bought my house 5 years ago: Interest rate of 3.25%, resale value has increased 17-20% when looking at comps.
Investment portfolio average annual return of the last 5 years: 13.6%

It would take a massive pullback in the markets to make this decision a bad one.

[Throwin Darts]

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.

I'm a commercial lender, a business owner, and a real estate investor so I can see this from all sides of the argument.

You are wrong in so many ways about your views on a business loan. If in fact a business is just a piece a paper with no tangible assets and you can find a bank stupid enough to lend you money on that then the only person that would be bad debt for is the bank, not the business owner.

And this whole real estate is the holy grail is ridiculous. Real estate can go down in value. Were you around in 2008 - 2010 by chance? All those banks weren't taking back those homes because they were going up in value. And cash flow can go away. Have a tenant leave in a crappy economy with no job growth, the replacement tenants aren't exactly lining up to get in there at the rents you had previously.

Not all debt is bad debt. With my business, I had an opportunity that cost $650,000. I sold it for $900,000. My options to finance it were to put up $650,000 in cash or to let the bank put up 90% and me put up $65,000. If I would have put up the cash my cash on cash return was 38%. With bank debt, my cash on cash return was 380% less my measly 5% interest rate. Its the concept of OPM, other people's money. Instead of doing one of these at a time, I could do 10 with the same amount of cash by using leverage.

Dave Ramsey has people forgoing maxing out retirement accounts so that they can pay down their mortgage. That's insane. If you work for 40 years, you get 40 cracks at that tax advantaged space. Once a year passes and you don't take advantage, you never get that back. And for what? To save an after tax 3% or so in mortgage interest? Last time I check, the tax savings on retirement account contributions would be multiples of 3%.

A lot of people will run into a job loss or major life event during the time in which they are paying off their mortgage. In my opinion, if you are looking for the safest play, I rather have tons and tons of cash on hand than a mortgage that I've paid off half way or so when trouble hits. When you hit hard times, no one will care if your house is half way paid off. No bank will lend you money on a half paid off house if you have no job. If I was a Ramsey follower, I'd be sacking away cash hand over fist and on the day that that cash was more than my mortgage, then I'd decide if I wanted to pay it off or not, not before. If you want to be mortgage free, that's the safest route to get there.

Ramsey is a peddler to the masses who are drowning in consumer debt. I agree that consumer debt is awful but that's where Dave's good advice ends.

[mjhaverkamp]

I'm a commercial lender, a business owner, and a real estate investor so I can see this from all sides of the argument.

You are wrong in so many ways about your views on a business loan. If in fact a business is just a piece a paper with no tangible assets and you can find a bank stupid enough to lend you money on that then the only person that would be bad debt for is the bank, not the business owner.

And this whole real estate is the holy grail is ridiculous. Real estate can go down in value. Were you around in 2008 - 2010 by chance? All those banks weren't taking back those homes because they were going up in value. And cash flow can go away. Have a tenant leave in a crappy economy with no job growth, the replacement tenants aren't exactly lining up to get in there at the rents you had previously.

Not all debt is bad debt. With my business, I had an opportunity that cost $650,000. I sold it for $900,000. My options to finance it were to put up $650,000 in cash or to let the bank put up 90% and me put up $65,000. If I would have put up the cash my cash on cash return was 38%. With bank debt, my cash on cash return was 380% less my measly 5% interest rate. Its the concept of OPM, other people's money. Instead of doing one of these at a time, I could do 10 with the same amount of cash by using leverage.

Dave Ramsey has people forgoing maxing out retirement accounts so that they can pay down their mortgage. That's insane. If you work for 40 years, you get 40 cracks at that tax advantaged space. Once a year passes and you don't take advantage, you never get that back. And for what? To save an after tax 3% or so in mortgage interest? Last time I check, the tax savings on retirement account contributions would be multiples of 3%.

A lot of people will run into a job loss or major life event during the time in which they are paying off their mortgage. In my opinion, if you are looking for the safest play, I rather have tons and tons of cash on hand than a mortgage that I've paid off half way or so when trouble hits. When you hit hard times, no one will care if your house is half way paid off. No bank will lend you money on a half paid off house if you have no job. If I was a Ramsey follower, I'd be sacking away cash hand over fist and on the day that that cash was more than my mortgage, then I'd decide if I wanted to pay it off or not, not before. If you want to be mortgage free, that's the safest route to get there.

Ramsey is a peddler to the masses who are drowning in consumer debt. I agree that consumer debt is awful but that's where Dave's good advice ends.

[EatemUpCats]

Junkmanhunter, I congratulate you on your successful business. I have owned 3 businesses myself and I own real estate investments as well. I also work 40 hours a week as a Controller of a large business. Don't get me wrong, debt is a necessary evil when it comes to business and can really make the business thrive. But just because taking on additional debt can make you more money doesn't turn it into "good" debt in my opinion. I believe the only true "good" debt is backed by real estate. Constantly goes up in value and we aren't making any more of it.

[Burnadell]

I'm a commercial lender, a business owner, and a real estate investor so I can see this from all sides of the argument.

You are wrong in so many ways about your views on a business loan. If in fact a business is just a piece a paper with no tangible assets and you can find a bank stupid enough to lend you money on that then the only person that would be bad debt for is the bank, not the business owner.

And this whole real estate is the holy grail is ridiculous. Real estate can go down in value. Were you around in 2008 - 2010 by chance? All those banks weren't taking back those homes because they were going up in value. And cash flow can go away. Have a tenant leave in a crappy economy with no job growth, the replacement tenants aren't exactly lining up to get in there at the rents you had previously.

Not all debt is bad debt. With my business, I had an opportunity that cost $650,000. I sold it for $900,000. My options to finance it were to put up $650,000 in cash or to let the bank put up 90% and me put up $65,000. If I would have put up the cash my cash on cash return was 38%. With bank debt, my cash on cash return was 380% less my measly 5% interest rate. Its the concept of OPM, other people's money. Instead of doing one of these at a time, I could do 10 with the same amount of cash by using leverage.

Dave Ramsey has people forgoing maxing out retirement accounts so that they can pay down their mortgage. That's insane. If you work for 40 years, you get 40 cracks at that tax advantaged space. Once a year passes and you don't take advantage, you never get that back. And for what? To save an after tax 3% or so in mortgage interest? Last time I check, the tax savings on retirement account contributions would be multiples of 3%.

A lot of people will run into a job loss or major life event during the time in which they are paying off their mortgage. In my opinion, if you are looking for the safest play, I rather have tons and tons of cash on hand than a mortgage that I've paid off half way or so when trouble hits. When you hit hard times, no one will care if your house is half way paid off. No bank will lend you money on a half paid off house if you have no job. If I was a Ramsey follower, I'd be sacking away cash hand over fist and on the day that that cash was more than my mortgage, then I'd decide if I wanted to pay it off or not, not before. If you want to be mortgage free, that's the safest route to get there.

Ramsey is a peddler to the masses who are drowning in consumer debt. I agree that consumer debt is awful but that's where Dave's good advice ends.

There you go! This could not have been said any better!

[Chad C]

I'm a commercial lender, a business owner, and a real estate investor so I can see this from all sides of the argument.

You are wrong in so many ways about your views on a business loan. If in fact a business is just a piece a paper with no tangible assets and you can find a bank stupid enough to lend you money on that then the only person that would be bad debt for is the bank, not the business owner.

And this whole real estate is the holy grail is ridiculous. Real estate can go down in value. Were you around in 2008 - 2010 by chance? All those banks weren't taking back those homes because they were going up in value. And cash flow can go away. Have a tenant leave in a crappy economy with no job growth, the replacement tenants aren't exactly lining up to get in there at the rents you had previously.

Not all debt is bad debt. With my business, I had an opportunity that cost $650,000. I sold it for $900,000. My options to finance it were to put up $650,000 in cash or to let the bank put up 90% and me put up $65,000. If I would have put up the cash my cash on cash return was 38%. With bank debt, my cash on cash return was 380% less my measly 5% interest rate. Its the concept of OPM, other people's money. Instead of doing one of these at a time, I could do 10 with the same amount of cash by using leverage.

Dave Ramsey has people forgoing maxing out retirement accounts so that they can pay down their mortgage. That's insane. If you work for 40 years, you get 40 cracks at that tax advantaged space. Once a year passes and you don't take advantage, you never get that back. And for what? To save an after tax 3% or so in mortgage interest? Last time I check, the tax savings on retirement account contributions would be multiples of 3%.

A lot of people will run into a job loss or major life event during the time in which they are paying off their mortgage. In my opinion, if you are looking for the safest play, I rather have tons and tons of cash on hand than a mortgage that I've paid off half way or so when trouble hits. When you hit hard times, no one will care if your house is half way paid off. No bank will lend you money on a half paid off house if you have no job. If I was a Ramsey follower, I'd be sacking away cash hand over fist and on the day that that cash was more than my mortgage, then I'd decide if I wanted to pay it off or not, not before. If you want to be mortgage free, that's the safest route to get there.

Ramsey is a peddler to the masses who are drowning in consumer debt. I agree that consumer debt is awful but that's where Dave's good advice ends.

Well said and spot on.

[junkmanhunter]

I'm a commercial lender, a business owner, and a real estate investor so I can see this from all sides of the argument.

You are wrong in so many ways about your views on a business loan. If in fact a business is just a piece a paper with no tangible assets and you can find a bank stupid enough to lend you money on that then the only person that would be bad debt for is the bank, not the business owner.

And this whole real estate is the holy grail is ridiculous. Real estate can go down in value. Were you around in 2008 - 2010 by chance? All those banks weren't taking back those homes because they were going up in value. And cash flow can go away. Have a tenant leave in a crappy economy with no job growth, the replacement tenants aren't exactly lining up to get in there at the rents you had previously.

Not all debt is bad debt. With my business, I had an opportunity that cost $650,000. I sold it for $900,000. My options to finance it were to put up $650,000 in cash or to let the bank put up 90% and me put up $65,000. If I would have put up the cash my cash on cash return was 38%. With bank debt, my cash on cash return was 380% less my measly 5% interest rate. Its the concept of OPM, other people's money. Instead of doing one of these at a time, I could do 10 with the same amount of cash by using leverage.

Dave Ramsey has people forgoing maxing out retirement accounts so that they can pay down their mortgage. That's insane. If you work for 40 years, you get 40 cracks at that tax advantaged space. Once a year passes and you don't take advantage, you never get that back. And for what? To save an after tax 3% or so in mortgage interest? Last time I check, the tax savings on retirement account contributions would be multiples of 3%.

A lot of people will run into a job loss or major life event during the time in which they are paying off their mortgage. In my opinion, if you are looking for the safest play, I rather have tons and tons of cash on hand than a mortgage that I've paid off half way or so when trouble hits. When you hit hard times, no one will care if your house is half way paid off. No bank will lend you money on a half paid off house if you have no job. If I was a Ramsey follower, I'd be sacking away cash hand over fist and on the day that that cash was more than my mortgage, then I'd decide if I wanted to pay it off or not, not before. If you want to be mortgage free, that's the safest route to get there.

Ramsey is a peddler to the masses who are drowning in consumer debt. I agree that consumer debt is awful but that's where Dave's good advice ends.

Very well said.

Junkmanhunter, I congratulate you on your successful business. I have owned 3 businesses myself and I own real estate investments as well. I also work 40 hours a week as a Controller of a large business. Don't get me wrong, debt is a necessary evil when it comes to business and can really make the business thrive. But just because taking on additional debt can make you more money doesn't turn it into "good" debt in my opinion. I believe the only true "good" debt is backed by real estate. Constantly goes up in value and we aren't making any more of it.

Thanks. I have had a few sleepless nights along the way.

You are correct in the fact that we aren't making anymore real estate.

I have the mindset, I'm not going to gamble on anything I can't control . I will gamble on myself though.

Good luck to the OP on trying to achieve his dream and become a business owner.

[Burnadell]

Junkmanhunter, I congratulate you on your successful business. I have owned 3 businesses myself and I own real estate investments as well. I also work 40 hours a week as a Controller of a large business. Don't get me wrong, debt is a necessary evil when it comes to business and can really make the business thrive. But just because taking on additional debt can make you more money doesn't turn it into "good" debt in my opinion. I believe the only true "good" debt is backed by real estate. Constantly goes up in value and we aren't making any more of it.

Well, apparently, I was wrong about you not understanding various businesses or finance.

I still stand behind my stance that not all business loans are bad. As a former banker for 23 years, I can say that businesses borrow money regularly, and working capital loans to finance inventory and accounts receivable are done daily. There is probably not a new car dealership anywhere that does not floor plan their inventory. Real estate loans and equipment loans...done every day. If businesses could not borrow money because it is a bad deal, commerce would come to a screeching halt. As a comptroller, I am surprised that you would have made such a comment. Most of the largest corporations have debt.