Advising on Debt: Balancing Risk and Opportunity for Clients

Introduction: The Fine Line Between Good Debt and Bad Debt

For most business owners, debt is a four-letter word they’d rather not deal with. But as a trusted advisor, accountant, or financial consultant, you know that debt isn’t the enemy. Mismanaged debt is.

When used correctly, debt can be a powerful tool to help a business scale, invest in growth, and build long-term value. When mismanaged, it can sink an otherwise successful company. Your role? Help clients strike the right balance between risk and opportunity while keeping their financial health in check.

At Cash Flow Mike’s All Access Events, we teach financial professionals how to analyze and guide clients through debt management. If you’re serious about helping clients master cash flow and strategic financing, you won’t want to miss it → Register Here

The Key Question: Is This Debt Working for Your Client?

Not all debt is created equal. The best way to guide your clients is to ask one critical question: Is this debt helping or hurting their business?

Good Debt vs. Bad Debt

🔹 Good Debt: Used for investments that increase revenue or improve efficiency. Examples include:

✅ Equipment that increases production capacity

✅ Marketing strategies with proven ROI

✅ Strategic expansion into new markets

🔹 Bad Debt: Borrowed funds that add financial strain without increasing value. Examples include:

❌ Taking loans to cover operational losses

❌ Using short-term financing for long-term assets

❌ Overleveraging without a clear repayment plan

Your mission as an advisor is to help clients assess whether they’re using debt wisely or digging a hole they can’t climb out of.

Step 1: Assessing Debt-to-Equity Ratio – The Golden Rule of Borrowing

One of the simplest yet most effective debt management tools is the Debt-to-Equity Ratio (D/E Ratio) a key indicator of financial stability.

📊 The Formula:

🔹 The Ideal Ratio: 2.5 or Lower

• If a company has a D/E ratio of less than 3, lenders see it as a low-risk business.
• If the ratio is higher than 3, the company is seen as overleveraged, making it harder to secure loans.

Your Role:

• Teach clients to stay within a healthy borrowing range by aligning their debt obligations with cash flow.
• Guide them to pay down high-interest debt first while leveraging strategic, low-cost financing options.

💡 Pro Tip: Clients who understand this metric can plan their borrowing strategically, increasing their chances of securing funding when they need it most.

Step 2: Matching Debt to the Right Financing Product

One of the biggest financial mistakes business owners make is mismatched financing, which is using the wrong type of loan for an asset or expense.

🔹 The Golden Rule:

📌 The length of the loan should match the life of the asset.

🚫 What NOT to do:

• Using a credit card (short-term debt) to buy equipment (long-term asset)
• Taking a five-year loan to fund one-time payroll expenses

✅ What to DO instead:

• Use short-term debt (lines of credit, credit cards) for short-term needs like inventory purchases.
• Use long-term debt (bank loans, equipment financing) for long-term assets like property and machinery.

Your job as an advisor is to help clients align their financing with their business strategy, ensuring they borrow smartly, not just borrow.

Step 3: Understanding True Borrowing Costs (It’s More Than Just Interest Rates)

Many business owners only look at the interest rate when considering a loan, but that’s just one piece of the puzzle.

🔍 Key Factors That Affect the True Cost of Borrowing:

✅ Loan Terms: Longer loans = more interest paid over time

✅ Prepayment Penalties: Some loans charge fees for early payoff

✅ Variable vs. Fixed Rates: Variable loans can change with the market, increasing payments unexpectedly

✅ Hidden Fees: Origination fees, annual fees, and penalties add up

Your Role:

• Teach clients to calculate the true cost of debt over time before signing on the dotted line.
• Help them compare multiple lending options to find the best financing terms.

📊 A simple example:

A $50,000 loan at 8% for 5 years sounds great until you realize a 7% loan with lower fees could save thousands over the loan term.

👀 Business owners often overlook these details. That’s why they need YOU!

Step 4: Creating a Debt Reduction Plan That Works

For clients already struggling with debt, help them take back control.

🔹 Top Debt Reduction Strategies:

1️⃣ Snowball Method: Pay off smallest debts first to build momentum.

2️⃣ Avalanche Method: Pay off highest interest rates first to reduce long-term costs.

3️⃣ Refinancing: Look for opportunities to consolidate or refinance at lower rates.

4️⃣ Cash Flow Optimization: Find ways to free up cash by improving receivables and cutting wasteful expenses.

Your clients don’t just need advice. They need a plan. This is where you stand out from the competition.

Help Your Clients Make Smarter Debt Decisions – Let’s Talk!

Debt isn’t just about borrowing money. It’s about using it strategically to fuel growth. Your expertise can make all the difference.

Want to dive deeper into these strategies and learn how to implement them for your clients?

📅 Schedule a call with me here: Schedule Here

Or, if you want to take your advisory skills to the next level, join us at Cash Flow Mike’s All Access Events. It’s where top advisors master cash flow, debt management, and financial strategy.

🚀 Reserve your spot today: HERE

Let’s build smarter, stronger businesses together.