Is using debt to fund a business a good idea?

Debt is a tool, not inherently good or bad. Business debt makes sense when the capital generates a return that exceeds its cost — equipment that earns more than the loan rate, working capital that captures a profitable contract, or inventory that turns faster than the financing period. Debt that funds operating losses or covers expenses without an ROI path is the dangerous kind.

In the companion video above, Brian walks through why blanket anti-debt advice — 'avoid all debt at all costs' — misses how businesses actually grow. The key distinction isn't 'debt vs no debt.' It's whether the capital deployed earns more than it costs.

The ROI test: the only question that matters

Before taking any business financing, run one calculation: will this capital generate returns that exceed the cost of the money? A piece of equipment financed at 12% annualized that generates $40,000 in additional annual revenue clears the bar. A $30,000 MCA (Revenue-Based Financing) at a 1.30 factor rate used to cover rent that doesn't generate additional revenue does not. The math, not the debt itself, determines whether the decision is smart.

ROI test in practice

A restaurant owner takes a $50,000 equipment loan at 9% APR (roughly $4,500/year in interest) to add a second pizza oven. The second oven adds $2,800/month in throughput = $33,600/year in incremental revenue. After ingredient costs (~40%), that's $20,160 in incremental gross profit — versus $4,500 in annual interest. ROI: approximately 348% on the cost of capital. This is 'good' business debt. Compare: the same owner takes a $50,000 Revenue-Based Financing advance to cover payroll during a slow month, with no operational change. Same $4,500+ cost — zero incremental revenue. This is 'bad' business debt.

When business debt works

Equipment and assets that earn: A piece of equipment, vehicle, or tool that directly generates revenue or reduces a cost that exceeds the loan payment.
Working capital for a specific contract: Inventory or payroll for a known, signed contract where payment is coming. The financing bridges a timing gap, not a revenue gap.
Expansion with proven unit economics: A second location, new hire, or new service line with documented historical margins. Scale what works — don't use debt to find out if something works.
Refinancing higher-cost debt: Using a term loan to consolidate MCA debt at a lower effective rate is arithmetic, not philosophy.

When business debt becomes dangerous

Covering losses: Debt that pays for recurring operating losses doesn't fix the problem — it delays it while adding interest cost.
Stack without a repayment plan: Multiple concurrent advances ('loan stacking') where total daily payments exceed cash flow is a liquidity trap, not a growth strategy. See Loan Stacking Risks.
No exit: If you can't articulate when and how the loan gets repaid from operating cash flow, it's a warning sign.
High-rate debt for low-margin use: A 1.45 factor rate advance used to buy slow-moving inventory doesn't work on a spreadsheet.

What business owners actually do

The 2023 Federal Reserve Small Business Credit Survey found that 54% of small businesses that applied for financing did so to cover operating expenses — not capital expansion. This is the category where the ROI test most often fails. — Federal Reserve Small Business Credit Survey 2023
The SBA notes that most small business failures involve inadequate capital or inability to manage cash flow — not excessive debt per se, but debt taken without a clear repayment pathway. — SBA.gov — Small Business Financial Basics

Revenue-Based Financing (MCA) has a higher cost floor

Revenue-Based Financing — sometimes called a Merchant Cash Advance — is a legitimate product for businesses with strong daily revenue and a specific short-term need. But its effective APR is typically higher than a term loan or SBA product. Run the ROI test before signing: the return on the capital must cover the factor-rate cost, not just service the payment.

Key takeaways

Business debt is a tool — its value depends entirely on whether the capital generates returns that exceed the cost.
The ROI test: does this loan produce incremental profit > annual interest cost? If yes, it's strategic debt. If no, it's expensive obligation.
Covering losses with debt delays the real problem and adds a cost burden on top of it.
Loan stacking — multiple concurrent advances — is one of the highest-risk patterns for small business cash flow.
Products vary in cost: SBA loans and term loans are the lowest-cost tier; Revenue-Based Financing is the highest-cost tier and requires the strongest ROI case.