Week 3: Good Debt vs. Bad Debt: How to Leverage Capital Without Losing Your Shirt
- Liisa Bartges
- Jun 4
- 3 min read
Welcome back to Week 3 of our series, The Scalable Small Business: Beyond the Basics. If you’ve been following along, you know we’ve already spent some time tidying up the foundation. In Week 2, we talked about Hidden Holes and how those sneaky expenses can drain your profits before you even realize they’re gone.
Today, we’re shifting gears from "saving" to "growing." Specifically, we’re talking about the D-word: Debt.
For many small business owners, debt feels like a scary monster under the bed. But in the world of business, debt is actually a tool. When used correctly, it’s like high-octane fuel for your growth. When used poorly? Well, that’s how you end up "losing your shirt."
At Ledgers By Liisa LLC, we believe in Keeping Two Eyes on Your Books, and that includes knowing exactly when to borrow and when to back away.
Is There Really Such a Thing as "Good" Debt?
In short: Yes. Good debt is capital that you leverage to increase your future net worth or earning power. It’s an investment in your business’s future.
Examples of Good Debt:
Equipment Upgrades: Buying a machine that allows you to double your production capacity.
Strategic Inventory: Bulk-buying materials at a discount to prepare for a known busy season.
Expansion: Taking out a low-interest loan to open a second location once your first is consistently profitable.
Revenue-Generating Hires: Financing the first few months of a new sales professional who has a proven track record.
The key to good debt is that it has a clear Return on Investment (ROI). You should be able to look at your QuickBooks (QBO) reports and see exactly how that borrowed money is going to result in more profit than the cost of the interest.
Spotting the Red Flags of "Bad" Debt
Bad debt is anything that drains your business without providing a path to growth. It’s often unplanned, reactive, and expensive.
Examples of Bad Debt:
High-Interest Credit Cards: Using plastic to cover routine operating expenses like rent or utilities because cash is tight.
Plugging "Hidden Holes": Borrowing money to cover losses without fixing the underlying problem (like the ones we found in Week 2!).
Lifestyle Spending: Using business credit for fancy office furniture or a luxury vehicle that doesn’t actually help you serve more clients.
Daily Repayment Loans: High-cost "merchant cash advances" that take a percentage of your daily sales, often suffocating your cash flow before you can breathe.
Why Clean Books are the Prerequisite for Borrowing
You wouldn't build a house on a swamp, and you shouldn't layer debt onto messy financials. Before you even think about applying for a loan or a line of credit, you need to ensure your bookkeeping is rock solid.
Lenders want to see your QBO data. They want to see that you understand your margins and that you have a plan. More importantly, you need to see those things. Clean books tell you if you can actually afford the monthly payments, even if business slows down by 20%.
This is where Full Service Bookkeeping becomes your best friend. We don't just categorize transactions; we help you see the story your numbers are telling.
LBL Perspective
From our seat at the desk, we see a lot of "panic borrowing." A business owner hits a dry spell, gets nervous, and takes the first high-interest loan that pops up in their inbox.
Our perspective? Debt is a strategic move, not a survival tactic. If you find yourself needing to borrow just to "keep the lights on," it’s time to pause and look at your expenses and pricing. Leverage should be used to climb a mountain, not to fill a hole.
Liisa’s Tip Jar
In The Tip Jar this week, I have one golden rule: Match the debt to the asset. If you’re buying a piece of equipment that will last five years, get a five-year loan. If you’re buying inventory that will sell in three months, use a short-term line of credit. Never use long-term debt to solve a short-term timing gap, and never use short-term, high-interest debt for long-term investments!
Ready to Scale Safely?
Leveraging capital is a huge milestone for any growing business, but it requires a clear view of your financial health. If you aren't sure if your books are "lender-ready," or if you're worried about the debt you're currently carrying, let's chat.
We offer a free consultation to help you get your records in order so you can make smart, confident moves for your business's future.
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