THE FORMULA TO KNOW IF DEBT IS GOOD OR BAD

When it comes to debt, people tend to split into camps. And these camps… they’re rarely shy.

You’ve got the Dave Ramsey disciples who treat all debt like it’s radioactive waste. If you can’t pay cash, don’t buy it. Period.

Then you’ve got the real estate and leverage crowd, like Grant Cardone or commercial investors, who brag about being “all in on OPM” (other people’s money) and use debt as a tool to 10x their portfolio.

And then there’s… well, you. The small business owner caught somewhere in between. You’re not flipping duplexes on TikTok, but you’re also not trying to pay cash for a $300K piece of equipment just because Dave Ramsey said so (and how often is that actually feasible in a real business anyways, amiright?).

So what do you do?

Most business owners default to one of two things:

• Avoid debt completely, out of fear or misunderstanding
• Take whatever they’re approved for, with no real plan to pay it back or deploy it wisely

Neither is smart. Because the truth is: Debt isn’t good or bad, it’s a lever. It can pull your business forward or snap back and whack you in the face.

The trick is knowing how to use it and when it’s worth it.

That’s what we’re going to talk about today.

We’re going to give you two tools to make smarter borrowing decisions:

1. A list of when debt actually makes sense (because timing and purpose matter)
2. A 3-Part Formula that helps you evaluate any debt decision (so you stop guessing and start acting like a capital allocator)

Because borrowing shouldn’t start with “Can I get approved?”

It should start with: “Will this debt make my business stronger without too much additional risk?”

WHEN DEBT MAKES SENSE

Before you ever run a calculation or fill out a loan app, you need to answer one question:

Why are you borrowing this money in the first place?

Too often, debt decisions are made out of urgency or vagueness. “We just need cash” or “we want to grow.” But if you don’t have a crisp reason behind the move, no amount of analysis will save you from regret.

Here’s your starting point: Debt only makes sense if it creates value, buys time, or preserves flexibility.

If it doesn’t do one of those three, it probably doesn’t belong in your business.

Let’s walk through the strategic reasons to borrow and what we call the “green zone” for debt:

To Smooth Timing

You’re profitable on paper, but cash always shows up late. Maybe your receivables lag 60 days behind work completed. Maybe your business is seasonal and revenue dips every winter.

In these cases, debt isn’t about growth, it’s about timing. A line of credit or short-term note helps you smooth the bumps without having to cut headcount or stop momentum.

To Front-Load a Return

This is classic investment logic: you can spend $100K today to generate $300K over the next year. But you don’t want to wait 18 months to save up that $100K.

Using debt to accelerate a clear, measurable return is one of the strongest use cases. It could be:

• Equipment that expands capacity
• A salesperson expected to drive new revenue
• A marketing campaign with proven ROI

Just make sure the return is real, not imagined.

To Unlock an Opportunity

Some deals don’t wait. A competitor comes up for sale. Your landlord offers first right of refusal. A software license or vendor deal has a huge discount for prepay.

Debt, when paired with speed and clarity, allows you to act. If you have a strong business but lack liquid cash, this may be your only shot.

To Preserve Strategic Cash

You might have plenty of cash, but you don’t want to drain it all for a single use. Especially when that use has a slow payback or low resale value (like a rebrand or backend system overhaul).

In that case, using debt preserves optionality. You keep cash available for higher-return opportunities down the road, or simply sleep better at night knowing your reserves are intact.

To De-Risk Volatility

Sometimes the smartest move is to restructure. Maybe you’re juggling multiple loans with uneven payments or high interest rates. A single, fixed-term loan can simplify your cash flow and reduce variability.

Debt isn’t always about more. It can be about making things safer.

To Buy Time During a Reset

If you’re pivoting your business model, exiting a bad client base, or going through a slow rebuild, a loan can serve as a bridge, not to growth, but to survival with strategy.

This isn’t about bailing water. It’s about creating enough space to rebuild on solid ground.

🟨 Proceed With Caution If:

• You “just need some runway” with no clear plan to fix your margins
• The debt is to patch a long-standing operational issue
• You’re betting on something vague or unproven (“this marketing should work”)

Now that you’ve clarified why you’re borrowing…

Let’s figure out if it’s actually a good deal.

THE DEBT DECISION FORMULA

When taking on debt, you’ve got your reason, right? The debt makes sense in theory.

But theory doesn’t pay the bills or keep you from losing sleep.

Most frameworks or reasons for taking on debt fall short in the same way: they focus purely on ROI or spreadsheet math. And while those numbers matter, they’re only one-third of what makes a smart debt decision.

Because here’s the truth:

Most borrowing decisions aren’t made with a spreadsheet.
They’re made in moments of pressure, hope, or fear.
They’re made when cash is tight, an opportunity feels fleeting, or you just want the stress to stop.

So what do we do?

We ask the people closest to the deal: our banker, our CPA, maybe even our financial advisor.

But here’s the problem… Many of the voices we trust have a financial stake in us saying “yes.”

The banker gets a commission (and hits their quota). The broker gets a placement fee. The lender only wins if you sign.

Even when they’re good people (and most of are), they’re not neutral.

Their business benefits if you take the money. There’s no reward for telling you to wait.

So what’s left?

You.

Your judgment.

Your ability to evaluate the deal not just from a return perspective, but from a position of strength: financial, emotional, and strategic.

That’s why I built this framework.

The Debt Decision Formula helps you make better borrowing decisions by evaluating:

1. Economics & Return: Will this make me richer?
2. Liquidity & Resilience: Can my business carry the weight and survive a storm?
3. Risk & Human Tax: What freedoms, or stresses, come with this note?

We’ll cover returns and payback. But we’ll also cover personal guarantees, stress levels, and what happens to your flexibility when the debt comes due.

Because the best debt decisions don’t just look good on paper.

They actually work in real life.

Let’s start with the most familiar lens:

PART 1: ECONOMICS & RETURN

Core Question: Will this debt actually make me richer?

This is where most people start, and often, stop.

They ask:

“How much is the loan?” “What’s the rate?” “What’s the ROI?”

That’s a fine beginning. But we’re not just looking for any return. We want to know if this debt accelerates net value creation for the business. And just because something pays off eventually doesn’t mean it’s worth the weight in the meantime.

So in Part 1, we test three key drivers:

1. Cost of Debt: not just your interest rate, but your fees and interest compared to the real expected return.
2. Opportunity Cost / Cost of Delay: by making this decision, what other opportunities are you forgoing? Not making a decision is also a decision.
3. Duration Match: how does the loan align with the useful life of the asset? If less, then it allows for savings and future cash purchases; if more, it could stop you from replacing when you need to.

Some powerful tools to evaluate these real dollar returns are:

• Payback Window Calculator: How long will it take to pay back principal + interest?
• ROI vs. APR Comparison: Visually compare return vs. cost of capital.
• Breakeven analysis: Breakeven helps clarify blurry middle-ground decisions.

It can be helpful to create “rules of thumb” on common investments, such as vehicles, to determine whether or not the investment decision is the right one right now.

PART 2: LIQUIDITY & RESILIENCE

Core Question: Can my business carry this debt and survive a storm?

A loan can look great on paper until you hit a slow month and the payment is still due.

That’s the danger here: debt introduces fixed cost into a variable world. You don’t just owe money when things go well. You owe it no matter what.

This part is about pressure testing your ability to handle the note without derailing operations or killing future options.

In part 2, we want to consider:

1. Cash Flow Cushion: do you have excess cash flow to cover payments during “lumpy” incoming cash?
2. Capacity Headroom: does this loan leave room for the needs you could have tomorrow? You have to understand all upcoming real, and future potential, needs to evaluate this.
3. Working Capital Fit: how does it work in comparison with your other short-term and long-term debt? For example, could a line of credit fill a gap? Do you have other debt maturing that could put pressure on you in the future?

Good liquidity metrics to look at are:

• Debt Service Coverage Ratio (DSCR) > 1.4x
• Debt Service < 75% SSCF (Steady state cash flow: see this article)
• Current Ratio > 1.5
• Quick Ratio > 1.0

The right parts for these can often be dependent on your business and industry. Use both historical numbers for your business and industry standards to determine what is healthy for you.

If Part 1 is about potential, Part 2 is about protection.

Don’t ignore it. Plenty of businesses have strong ROI… and still drown in payments.

Next, we face the final and most underestimated part of the debt decision:

PART 3: RISK & HUMAN TAX

Core Question: What freedoms, or nightmares, come with this note?

Let’s be real: numbers alone don’t keep you up at night.

What keeps you up is:

“If I sign this and things go south, do I lose my house?”
“If we take this loan, does it change how we lead or hire?”
“What happens if the bank calls something due?”

Part 3 is where we measure the emotional, legal, and cultural weight of the debt. Ignore this, and even the best spreadsheet won’t protect you from burnout or regret.

1. Flexibility Penalty: with each piece of debt, you lose flexibility. Only you can know how that makes you feel. If you value flexibility, look for loans that allow for an “easy” out.
2. Personal Risk Load: do you have a personal guarantee (PG)? Are you cross-collateralized? Balloon payments? Ask: am I good with the worst case scenario here?
3. Cultural / Stress Tax: Debt changes how you show up. For some, it creates focus. For others, it creates anxiety. And at a team level, it can shift how risk is tolerated or how growth is pursued. Again, this can only come from looking internally. What is your stress level and how does the new debt impact it?

PUTTING IT ALL TOGETHER

I can’t create a scale for you here, as many of the 3 per part can be adjusted to your personal criteria. Ask:

1. What are my criteria in each part?
2. How should each of these 3 parts and each sub-criteria be weighted?

Once you’re done, you could end up with something like this… Each part gets a score from 0 to 10, giving you a 30-point scale:

We’re not creating a complicated spreadsheet, but instead doing a gut check that blends math, risk, and emotion… all the real, and essential, ingredients of good capital allocation.

EXAMPLE SCENARIOS

(as created with ChatGPT)

Buying a $150K work truck

• Part 1: ROI is solid, cost of capital is low, term matches asset → 9
• Part 2: DSCR is tight due to recent hires → 6
• Part 3: PG required, but owner’s okay with risk → 8

Score: 23 (Renegotiate term or hold off 60 days)

Using $100K to fund a sales hire

• Part 1: No guarantee on results, high potential upside → 6
• Part 2: SSCF is strong, capacity wide open → 9
• Part 3: No collateral, flexible note, minimal stress → 9

Score: 24 (Acceptable, but track results fast)

Taking on $500K in SBA debt to acquire a competitor

• Part 1: Strong IRR, long-term synergy → 9
• Part 2: Will stress SSCF for 18 months → 5
• Part 3: Heavy PG, rate lock good, but stress = 8/10 → 6

Score: 20 (Proceed cautiously. Ensure deal integration is solid and scenario planning gives you outs)

ACTION STEPS

Debt isn’t just a financing decision. It’s a leadership decision.

And you don’t need to be a banker or spreadsheet wizard to make good ones.

You just need a simple lens:

• Why are you borrowing?
• Does it pass the 3 parts?
• Will this decision still make sense when things get bumpy?

Spend some time this week determining your criteria and weighting for each part in the debt formula.

Remember: The best operators aren’t scared of debt, but they’re not casual about it either. They borrow on purpose… with a plan, a margin, and an exit.

Use this formula. Score your options. Talk about it with your team.

Because smart debt doesn’t just buy assets, it buys confidence, clarity, and momentum.

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