Using debt strategically to grow wealth is a tactic commonly used by the wealthy. This approach is particularly relevant right now when you consider high inflation, limited savings and rising asset values.

In this article, we look at how debt can be “good”, and how to leverage debt to increase wealth.

What counts as “good” debt?

Debt is considered “good” when it is used to buy appreciating or income-generating assets. By comparison, debt is “bad” when you use it to buy depreciating goods or for consumption without return.

This is a simplified way of putting it. In reality, what might be considered bad debt can be leveraged for good and vice versa. This becomes clearer when you take these facts into consideration:

• to build wealth, total profits have to exceed total costs (which have a way of accumulating)
• profits might emerge only over the long term (it can take time and work before an asset you buy starts to deliver significant returns)
• the future isn’t certain
• pure profit isn’t the only factor that makes it “smart” to take a loan (in some scenarios, a loan that’s not in your immediate best financial interests may be the smartest way forward).

All debt comes with risk, but that doesn’t mean it’s not worth taking. 

The classic example: property investment using home loans

Using a home loan to buy property is one of the most common examples of “good” debt. The debt is large but the asset generates income and appreciates over time.

In reality, this is not always the case. Buying property carries costs that can mean your returns are delayed. Also, property doesn’t always appreciate.

Despite this, property remains one of the safest and most common ways to use debt to build wealth.

Using a business loan to grow income

Business loans are a form of debt that can be good or bad. A loan that grows a company would be considered good. However, getting into debt to try to save a failing business would not be.

There are many ways that debt can be beneficial to a business. Starting a business requires considerable start-up capital. Most entrepreneurs begin with a business loan.

Borrowing to grow can be a smart move. New equipment and expanding a business’s offering for increased profit requires a cash injection. If done wisely, the new income will cover the debt and set a business up for the future.

Asset finance for income-producing tools

When bank loans take too long to be approved, business owners can use fully-owned physical assets to secure a loan.

An asset-based loan is ideal for investing in income-producing equipment or vehicles that quickly allow a business to start earning money.

Examples include farming equipment, delivery vehicles, spray-painting equipment, large-format printers, car mechanic tools and earth-moving vehicles.

Because the return on investment is fast, the debt is quickly repaid. A business has secured a source of income that would not have been possible without the loan.

Debt recycling or using equity to invest

Debt recycling is another wealth-building strategy that replaces bad debt with good. A common form is using the equity in a mortgaged property to raise investment.

When a property’s value is greater than the debt on it, this equity can be used to take on further debt with higher returns. These returns can be used to pay off a home loan. This approach can apply to other assets.

Ways to use debt to build wealth

Used the right way, debt is an indispensable tool for building wealth. Other ways to use debt include:

• Debt consolidation: this combines all current debt into one loan with a better interest rate so you can pay off the debt faster.
• Property investments: loans to buy property that generate an income can help grow a property portfolio.
• Personal loans: personal loans can be considered wealth building if they’re used for an investment with good/fast returns or to buy an income-generating asset.
• Student loans: loans that let you study can increase your ability to earn a higher salary with a better qualification or in-demand skills.

Caution: risk management is key

There is inherent risk in all forms of debt, so management is key.

You must fully understand the type of debt you are taking on and how it might help you grow your wealth. You must also understand the risks involved.

Consider how interest-rate fluctuations could affect you. Would you manage repayments if the interest rate went up?

Never become overleveraged and risk debt becoming unmanageable. Don’t take on more debt than you’re able to repay or is more than the value of your assets.

How Lamna helps UK clients unlock liquidity

At Lamna, we specialise in loans that allow our clients to unlock the liquidity of their physical assets.

Simply put, our clients use the value of a movable asset – a car, painting, luxury watch, gold – as collateral on a fast, short-term loan.

This loan can be used to invest in any of the ways discussed above. With a good investment, a client has no trouble repaying the loan, doesn’t have to sell the asset, and builds wealth.

Business use cases: examples of generating wealth through asset-based loans

These examples show how a business owner might use an asset-based loan from Lamna to build wealth.

The owner of a large-scale bakery uses its second delivery vehicle to secure an asset-based loan to pay for an industrial mixer than speeds up the baking process. The business can then take on more orders and increase revenue. The business still functions with one delivery vehicle. Once the loan is repaid with the new income, the second vehicle is returned.

A shop owner comes across a sale on items regularly sold in his shop. The goods are heavily discounted but the sale is ending in two days. The owner uses a valuable luxury watch to secure a short-term loan to buy the goods. The shop increases profit and the owner only surrenders his watch for the duration of the loan.

Smart ways to use debt in the UK can include getting an asset-based loan to grow your wealth.

At Lamna, we offer quick, convenient asset-based loans with competitive interest rates (and no hidden fees). Call 0330 341 1707 for more information or apply online now.