She had the opportunity to take out a loan at 0% interest for a year, followed by 6% after the introductory rate expired.
This machine would allow her to offer a new service to her existing clients at a higher rate than any services she currently offers.
She had already surveyed her existing clients (so proud of her!) and found that several were interested in the service now, and many more said perhaps in the future.
But she was hesitant to pull the trigger.
She had always been taught that debt is “bad” and wanted to be smart about the way she grows her business.
So even when I showed her that the machine would easily pay for itself in less than a year…she hesitated.
The idea that debt is bad is such a false idea that I can only shake my head when someone tells me this!
Now don’t get me wrong…
You COULD go into high-interest (ie - credit card) debt buying things that won’t cash flow for you and quickly find yourself trapped.
That’s not what I’m talking about.
I’m talking about a strategy that the top 1% of wealthy Americans use EVERY. DAY. to ethically use other people’s money to grow your own wealth.
A lot of business owners risk their own personal savings when starting a business.
(Don’t get me wrong…I’ve made this mistake too!)
Worse, when they start researching the OPM (Other People’s Money) Strategy, many business owners risk their own personal credit, too.
This puts your family at risk by risking your home and other personal assets!
Instead, we want to build up business credit so you can borrow money like my client did…at low interest, and only spend it on investments that have the potential to cash flow at a rate higher than the debt.
If you can borrow money at a lower interest rate and use it to invest in an asset that makes you money at a higher rate of return...this is leveraging Other People’s Money (OPM).
If you borrow $20k at 0% APR to buy a machine that will bring more money into your business, the first thing we have to ask ourselves is…how much do I need to make in the first year to pay this off?
The wrong answer is $20,000.
Why? Because you haven’t factored in how much it will cost you to deliver the service.
If this machine will allow you to offer an additional service that requires no marketing, or added manpower and materials then perhaps you could do this. But that is very unlikely!
So the next question we have to ask is what percentage of the sale of this service will be profit?
Let’s say that the $20k machine will allow you to offer a $500 service.
Each sale requires an extra hour of your time, plus $30 of supplies.
If you’re paying yourself $100/hour, that means $130 of your $500 is the cost of delivery.
If we also include 10% for marketing costs, that means you have $320 in profit for each sale.
Depending on your tax rate, you likely can spend about $200 of that on paying the debt back.
So it will only take you 100 sales to pay off the $20k debt.
In the case of my client, she could easily do that in a few months! Which means she will have made a profit on the machine that she bought without risking her own credit or money…and after a few months will have an additional high-profit income stream for her business.
Now let’s say she wasn’t getting it at 0% for a year. Let’s pretend, for a moment, that she was going to owe 6% on the machine from day one.
That would have looked like this:
After a year, she would have owed $21,200 instead of $20k. (That’s if she never made any payments)
In her case, that’s STILL irrelevant because she only needs to sell the service 106 times to pay that off! Since she sees 50-60 clients per week already, that’s easy peasy lemon squeezy.
So why do we fear debt?
Because some old rich white guy told you it's bad?
Consumer debt is bad! Spending money on things that have no return…risking your personal credit on vacations, cars, and other things that depreciate over time is not smart.
But OPM? Using the bank’s money (or an investor’s money) to grow more money? That’s about as smart as it gets.