Good debt vs bad debt: Learn what they are

For many they find debt to be daunting to contemplate But the truth is that taking on the right type of debt can allow your company to grow and flourish. So , how do you figure out what debt makes good business sense? It’s all about considering how long-term value it will bring to your business. What is key is comparing the benefits you expect to reap from the debt (such as being able to make more sales) against the cost of taking on the loan (such as interest and charges) and ensuring the former is more than the latter. So long as you’re using the loan to purchase items that can improve the performance and efficiency of your company, there’s no reason to avoid the use of debt. Taking on debt can also assist in the resolution of any unexpected short-term cash flow issues you could confront. If you’ve run any stock-based business, you will understand the cash flow problems that short-term companies often have to face. A partnership with a finance company can provide relief to stop any stock outs or get you access to the bulk offer of your most popular product.

What is good credit?

In essence, good debt allows businesses to leverage capital they wouldn’t otherwise be able to access for the purpose of increasing their returns. Good debt is one that’s going to aid your business in moving to the next stage - it could be used to purchase a big piece of kit such as delivery vehicles, or even loans to assist with advertising and marketing. As long as you’ve made a return on that debt (bigger than the amount you incurred) then it’s generally going to be a good debt. As an example, a skin abrasion and scar management clinic owner obtained a small business loan to purchase a new salon, renovate the salon and employ an expert business coach. This was considered to be a great debt. The salon was quite old and dismal. I wanted to brighten the space and create an attractive space where people were eager to go, where it’s nice, cozy and welcoming. It can also be used to increase a business’s working capital as well as smooth cash flow issues during tough or slow periods like the summer holiday season for businesses that are service-based. The majority of people believe that Christmas is among the best occasions in the calendar. However, when everyone else is enjoying themselves the holiday season can turn into the most difficult business time of the year. Customers pay late, sales may decline and suppliers would like to be paid.

What is bad credit?

Bad debt, on the other hand is typically something that costs more than you can get from it. This means that it’s unlikely to drive sales, it’s unlikely to increase your bottom line, or it’s unlikely to enhance the overall performance or value of your business. For example, under certain circumstances, a new company car could be a bad credit. If you borrow money to purchase that vehicle is going to result in you being able to provide more services to more people in more places and it’s a vehicle that you require for the delivery of an item, that’s an asset to the business. If it’s simply an automobile you’re purchasing just to get a brand new corporate car but isn’t providing any direct benefit to your company, it’s an unworthy credit.

How to determine the difference between good and bad debt

When it comes to determining whether the business finance you’re thinking about is an excellent debt or a bad debt, it’s important to crunch the numbers. He suggests that you ask yourself these questions:

• What amount of money can I make from the funds I’ve borrowed? What’s the best way to make money?
• How much interest and costs will I have to cover for the credit?
• Are I financially secure in the long run?
• How many years will it take to reach that positive standing?
• Can the funds be put to use to purchase other products for better returns within a shorter time?
• Am I spending beyond my means?

You should also consider the potential benefits that funding could provide, and whether these opportunities will bring positive outcomes for your company. When investing, you need to know the value you’re receiving on your investment. Perhaps a revamp of your website or your shop can attract more customers, or a new piece of equipment may offer a completely new service line and revenue stream. The key is to set a budget for the return, the repayment timetable and the capacity of your business. If you’re unsure the likelihood of finance as a good or bad debt to your company, speak with your accountant.