Good debt vs bad debt: Learn what they are

For many the idea of debt is daunting to accept however the reality is that taking on the right kind of debt will allow your business to grow and grow. How do you figure out which debt is good business sense? It’s all about considering the long-term value the debt will likely bring to your company. It is crucial to compare the benefits you expect to receive from the debt (such as being able to generate more sales) versus the costs of taking on the loan (such as fees and interest), and making sure you’re getting more for the latter. So long as you’re taking on debt to purchase items that can improve the efficiency and effectiveness of your company, there’s generally nothing wrong with taking on debt. The use of debt can aid in overcoming any sudden cash flow issues you could encounter. If you’ve ever had the opportunity to run an investment company you’ll be aware of the issues of cash flow that businesses often face. Partnering with a finance provider can provide relief to stop the stock outs and give you access to the bulk sale on your top-selling product.

What is good deben?

In simple terms, good debt allows companies to leverage capital they wouldn’t otherwise have access to for the purpose of increasing the amount of money they earn. Good debt is debt that can help your business step up to the next level - it can be for buying the most expensive equipment such as delivery vehicles, or even debt to help with marketing and advertising. As long as you’ve got the potential to earn a profit from that loan (bigger than the amount you incurred) then it’s generally going to be a great debt. For instance, a skin wound and scar management clinic’s owner obtained a small business loan to purchase the salon a new one, remodel the premises , and also hire an experienced business coach. It was deemed to be a good credit. The salon was quite old and dilapidated. I had to bring the space and create a beautiful space where visitors wanted to be in, where it’s warm, cosy and inviting. Good debt can also be used to boost a business’s working capital and smooth out cash flow problems during difficult or quiet periods like the summer vacations for service-based businesses. The majority of people believe that Christmas is one of the most pleasant seasons of the year. However, when everyone else is enjoying themselves it can also turn into the worst business period in the whole year. People pay you late, sales can decline and suppliers would like to be paid.

What is a bad debt?

Bad debt On the other hand is typically something that costs more than you get out of it. So it’s either not going bring in sales, or it’s not likely to boost your bottom line, or it’s not likely to increase your overall productivity or value of your business. For instance, in certain circumstances, a new company car can be considered a bad loan. If you’re borrowing money to purchase the car will enable you to perform more work for the greater number of people across more places and it’s a vehicle which you’re required to have in order to offer products, that’s an asset that adds value to your business. If it’s simply a vehicle that you’re buying just to get an impressive new car for the company but isn’t contributing any tangible value to your business, then it’s an unworthy loan.

How to determine the difference between good and bad debt

In order to determine the possibility that the business finance you’re contemplating is an excellent debt or a bad one, it’s essential that you crunch the numbers. He suggests that you ask yourself these questions:

• How much can I make using the money I’ve borrowed? What’s the chance?
• How much interest and cost will I be required to pay on the credit?
• Are I in a good financial position over the long term?
• How many years will it take to get to that situation?
• Can the money be used elsewhere to get a higher return within a shorter period?
• Am I spending beyond my means?

It is also important to consider the possibilities that additional funding can provide, and whether those opportunities will result in positive outcomes for your business. When investing, you have to be aware of the ROI you’re earning on your investment. Maybe upgrading your site or shop will draw more customers in or a brand new piece of equipment can bring you a brand new service line and revenue stream. The key is to set a budget for the return, the repayment plan and your capacity. If you’re not sure what the outcome of your finance is being a great debt or bad for your company, talk to your accountant.