Good debt vs bad debt: Learn which is which

For many the idea of debt is daunting to take on however the reality is that taking on the right kind of debt can allow your business to grow and flourish. How can you figure out what kind of debt is best for business sense? It’s about looking at the long-term value the debt will bring to your company. The most important thing to consider is the benefits that you hope to reap from the debt (such as the ability to make more sales) versus the costs of taking on the loan (such as interest and fees), and making sure the former is more than the latter. If you’re using the debt for purchases that are going to drive the performance and efficiency of your business, then there’s generally nothing wrong with the use of debt. The use of debt can assist you in dealing with any unexpected short-term cash flow problems you might be facing. If you’ve run any stock-based business you’ll be aware of the short-term cash flow issues companies often have to face. Partnering with a finance provider can provide relief to stop any stock outs or get access to the largest sale on your top-selling product.

What is good deben?

In most cases, good credit allows businesses to access capital that they might not otherwise have access to for the purpose of increasing the returns. Good debt is debt that can enable your business to move to the next step - it could be to buy an expensive piece of equipment, getting delivery vehicles or even to help in marketing and advertising. As long as you’ve got the potential to earn a profit from that loan (bigger than the expenses) then it’s likely to be a great debt. As an example, a skin abrasion and scar management clinic owner took out a small business loan to buy a new salon, renovate the facility and employ an experienced business coach. It was considered a good debt. The premises were quite outdated and in need of a makeover. I needed to freshen the place and create a an inviting space that people were eager to go and feel cosy and inviting. The good debt is also used to boost a business’s working capital, and to smooth out the cash flow challenges during challenging or slow periods such as the summer vacations for companies that provide services. For the majority of people, Christmas is among the most wonderful time of the year. Unfortunately, as everyone else is having a blast it can also turn into the worst business period that year. Paying customers are on time, sales might decrease and suppliers will want to be paid.

What is a bad debt?

Bad debt On the other hand, is generally something that is more expensive than what you get out of it. So it’s either not going boost sales, it’s not going to improve your bottom line, or it’s not likely to increase the overall value or productivity of your company. In certain conditions, a new company car can be a bad debt. If you borrow money to purchase the car will lead to you being able to do more work for more people in more places and it’s a vehicle that you need to have for the delivery of your product, then it’s an asset to the business. However, if it’s just an automobile you’re purchasing for the sake of having an impressive new car for the company, and it’s not really adding any direct value to the business, that’s a bad loan.

How do you determine whether you have the difference between good and bad debt

When it comes to determining what business financing you’re considering will be a good debt or a bad debt, it’s important to calculate the numbers. He recommends you ask yourself these questions:

• How much can I make with the money I’ve borrowed? What’s the opportunity?
• How much interest and costs will I have to cover for the amount of debt?
• Do I stand in a positive financial position over the long term?
• How many years will it take to achieve that positive situation?
• Can the funds be put to use elsewhere to get a higher return within a shorter period?
• Are I spending more than my means?

You should also consider the potential benefits that funding will provide, and whether these opportunities will bring positive outcomes for your company. When investing, you have to know the value you’re receiving on your investment. Perhaps upgrading your website or your store will draw more customers in or a brand new piece or piece of equipment could give you a new service line and revenue stream. The most important thing is to prepare the return in advance, as well as the repayment timetable and your capacity. If you’re still uncertain whether the finance you take on will end up being a good debt or a bad debt to your company, speak to your accountant.