Debt, also known as financial leverage, is a valuable tool in every business person’s arsenal. Some financial advisors suggest avoiding debt at all costs. In fact, debt allows one to make investments beyond one’s financial means. For example, when you buy a car with a car loan, you’re usually using debt to buy a car you can’t afford. You could try to buy a cheaper car, but that wouldn’t look good.

Debt Can Be Good

When you’re sure a business will turn a profit, debt can be the difference between success and failure. For example, if you want to buy an apartment building, debt can prove invaluable. Real estate is pretty safe, and you can usually calculate whether the rents will cover your mortgage payment ahead of time.

The use of debt becomes more dangerous with speculative investments, or even investments you’re just a little bit less confident in. For example, you may have a great idea for a new clothing store, but that store may never get off the ground. If you finance your equipment and inventory, and you sign a lease you can’t afford, you’re going to get into serious trouble.

When to NOT Use Debt

It is almost never a good idea to use debt to finance an asset that won’t give you a profit. For example, using debt to finance a boat is almost always a terrible idea unless you’re a fisherman.

Even using debt to finance buying a car is a bad idea. Even if you need a car to get to work, you can always buy a cheaper car.

Avoiding Debt is a Safe Bet

There are exceptions to every rule, but generally avoiding debt is a safe bet. When you avoid debt, you minimize the damage failure can cause. This damage control takes a lot of pressure off you and allows you to try riskier businesses without losing your shirt.