A short YouTube tutorial by Mike Andes explaining whether to use debt or cash to grow a small business (lawn care/landscaping). Uses a concrete numerical example comparing two financing scenarios (all-equity $200,000 vs. $100k debt + $100k equity) to show how leverage affects return on equity, illustrating risk–return tradeoffs and the importance of predictable unit economics.
Questions this video answers
$200,000
$200,000
$100,000 debt and $100,000 owner equity
$28,000
14% (28,000 ÷ 200,000)
Chapters
Hey, everyone, I'm Mike Andes, and today I'm going to show you whether you should use debt or you should use cash when it comes to growing or starting your business. Here we have an example. I'm going to walk you through it. Looks like a bunch of humble dumble. Trust me, I'll make it make sense of it. Let's assume that you have a lawn care landscaping business, and you're asking yourself, should I go get a loan or should I use cash to grow my business? We're going to use two different scenarios. Top scenario here is we use $0 in debt and we invest $200,000 of equity. Now, equity, when it comes to a balance sheet, really is the cash that you, as the owner invest or owner's equity. Oe you might see, that's the first scenario. Second scenario is we're going to get debt of $100,000 plus only $100,000 of our own owner's equity. All right? We're going to go buy $200,000 worth of trucks, trailers, equipment, mowers, all the rest of it, whatever you might need. We're at $200,000 of assets. In both scenarios, that would be the case. We're going to now assume that we get those. Those assets, all the trucks, the trailers, equipment, etc. And we get $28,000 in profit because of those assets, right? So $28,000 in profit because of those assets. So there's a 14% return or 28,000 divided by 200,000. So $28,000 in profit divided by our total assets. That equals 14% return on our total assets. That does not change based upon our financing. But what gets really interesting now is, okay, what's our return on equity? So in the top scenario here, I'm going to put all my cash into the business. $200,000 of equity goes into the business, and no debt, no debt whatsoever. Therefore, I'm going to have a 14% return on the $200,000 of equity that I invested in the business. My own cash, my own savings, that's in a 14% return. That's pretty good. Really. You know, honestly, it's hard to get 14% return like stocks or bonds or even the real estate market. Sometimes 14% return, not so bad. Now let's go look what happens when you use leverage or use debt. Can we achieve better return on equity? All right, we have $100,000 in debt now and $100,000 in equity. So we're going to go get a loan for $100,000, we're going to have an 8% interest, therefore we're going to have to pay $8,000. Let me get a little closer here. $8,000 is going to be interest, expense. So now our 28,000 profit that we have over here becomes only 20,000 because we have an $8,000 worth of interest, expense or loan servicing to get this debt. Alright, well now I only have $20,000 in profit, but when I look at the return on equity, I'm actually 20% because I only have to put in $100,000 worth of equity. I got $20,000 in profits because of that. I got 20% return. Essentially I went from 14% return to 20% return, almost 50% more return on equity because I use debt. This is the power of using debt and leverage in your business to grow. Should you use debt, should you have that financial risk? That's up to you because at the end of the day you are taking more risk when you take on debt. That's why Dave Ramsey and so many financial advisors are going to tell you not to take debt because it's much, much more risky. But, but with more risk comes more return. What it really comes down to is have you built a business model that is system centric and is predictable enough to know that when you pump this money in, you're going to come up with these profits? Because if you don't come up with these profits, you could be negative $8,000 in the hole. If everything goes to squat, you still got to pay interest on this loan. Whereas up here you could just lose your money and you can walk away. So should you get debt, should you get a loan, it really comes down to your confidence in these kind of returns. On are you confident that when you get the $200,000 of equipment, it's actually going to lead to $28,000 worth of profit? Knowing your numbers is extremely important and these are the type of things you need to know when it comes to making decisions in your business. Around debt, around investing in your business and growing it quickly. These are the type of things we talk about in the MBA for Entrepreneurs course. Link down below. I look forward to seeing you there. I'm Mike Andes. We'll see you in the next video.
