Other People’s Money (OPM): When debt is a tool, not a trap
Most entrepreneurs are taught one of two conflicting ideas about debt and that is to 1) avoid it at all costs or 2) use the leverage debt allows to scale faster. Neither idea is universally right or wrong.
Debt becomes a trap when you don't understand how the business model converts capital into returns. But it can also be a tool when the business produces returns that exceed the cost of capital.
That distinction is the core of understanding OPM (Other People’s Money). And it’s why some founders use leverage to build life-changing wealth, while others use it to fail faster.
How OPM can help lead to wealth creation
In my book, The Value Equation, I talk a lot about how OPM isn’t something to fear. In fact, it’s one of the Six Variables that determine equity returns.
As a 3X NYSE business founder, the question to me isn’t, “Should entrepreneurs use debt?”
The question is: Does each dollar of invested capital, whether OPM or equity, produce more value than the creation cost?
If the answer is no, capital (regardless of where it comes from) destroys value. But if the answer is yes, capital – especially OPM – increases equity value. This is why sophisticated founders and investors use leverage intentionally. Because OPM isn’t simply a way to access money, it’s a way to increase funding you can put to work increasing the value of your business.
When Other People’s Money is a trap
Entrepreneurs get into trouble when they use financing to cover losses instead of producing returns.
OPM becomes destructive when:
- Capital is deployed before the business model is validated
- Borrowed funds fuel unprofitable growth
- Cash flow timing is ignored
- Margin assumptions are incorrect
- The company scales negative unit economics
Under those conditions, revenue increases but expenses increase faster, and debt payments accelerate the decline. The most painful part is that the business can be growing, but still destroy equity value because of the trap that debt from OPM creates.
This is exactly why fear of debt exists…because entrepreneurs see many examples of OPM used poorly.
How you can use OPM as a tool
In The Value Equation, OPM supports wealth creation when two of the variables are working in your favor:
1. The Amount of OPM used
2. The Cost of OPM
Debt becomes a wealth amplifier when the returns from the business exceed the cost of capital.
A simplified version looks like this:
- Borrow capital at X%
- Produce returns at Y%
- If Y% > X%, wealth compounds
In a previous article (where you can review the math breakdown of all 6 variables), we used a restaurant example where the OPM cost = 8% and the Equity return = 89.3%. Borrowing at 8% to produce an 89.3% return isn’t irresponsible. It’s strategic value creation. This is why founders who understand the Value Equation actively seek OPM after validating their model.
The problem is that most entrepreneurs have been taught to measure the business through revenue, not returns, so they can’t see whether capital is being used productively or destructively. Debt feels risky when you don’t know the true return on capital and haven’t accounted for other variables including maintenance capital requirements and business model fundamentals like cash flow timing. In cases like this, you’d be better off avoiding Other People’s money, not because debt is bad, but because the business model is unclear.
Shifting from operator to wealth builder
There’s a turning point that happens when an entrepreneur begins thinking like an investor rather than an “operator.” In the operator mindset, debt is dangerous because you’re focused on sales and working for income.
The Wealth Builder Mindset sees OPM as a tool and focuses on returns and expanding equity value. When that shift happens, you stop trying to “pay off debt” and start trying to maximize value creation per unit of capital.
The bottom line is that, yes, debt can destroy a business. Debt can also build generational wealth. And the determining factor for which side of the line you’ll fall on isn’t the interest rate; it’s whether your business value outpaces the creation cost. When you understand the Six Variables of the Value Equation – including the amount of OPM used and the cost of OPM – the conversation around debt changes.
You remove the emotion and get strategic and mathematical about it. You don’t get wealthy by avoiding Other People’s Money.
You get wealthy by using Other People’s Money strategically in a business model that creates value worth more than it cost to create.
Learn to apply OPM and the other 6 Variables of the Value Equation to your business model. Subscribe to my YouTube channel where I break down every variable step-by-step so you can use the resources available to you as a tool, not a trap.
