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 type of debt will allow your business to grow and flourish. So , how do you figure out what kind of debt is best for business sense? It’s about looking at the long-term value the debt will likely bring to your company. The most important thing to consider is the benefits you’re hoping to gain from borrowing (such as the ability to increase sales) versus the costs of the debt (such as interest and charges) as well as ensuring you’re getting more for the latter. As long as you’re taking on debt to finance purchases which will boost the performance and efficiency of your business, then there’s no reason to avoid debt. It can help you overcome any unexpected short-term cash flow issues that you might be facing. If you’ve ever had the opportunity to run an investment company you’ll be aware of the short-term cash flow issues businesses often face. Working with a financial institution can ease the burden of any stock outs or get access to the largest offer of your most popular product.

What is good loan?

In simple terms, good debt allows companies to access capital that they might not otherwise have access to for the purpose of increasing the amount of money they earn. Good debt is one which will assist your company in moving to the next step - it could be for the purchase of an expensive piece of equipment and delivery vehicles or even loans to assist with advertising and marketing. As long as you’ve got an income from the debt (bigger than the expenses) the chances are it’s going to be a good debt. As an example, a skin abrasion and scar management clinic proprietor took out a tiny business loan to buy a new salon, renovate the premises and hire a business coach which was deemed to be a good credit. The salon was quite outdated and in need of a makeover. I had to bring the space and create an inviting space that visitors wanted to be in, where it’s warm, cozy and welcoming. The good debt is also used to boost a business’s working capital and smooth out the cash flow challenges during challenging or slow periods for instance, like the summer holidays for businesses that are service-based. For the majority of people, Christmas is among the most enjoyable time in the calendar. However, when everyone else is enjoying their time this can be the most difficult business time in the whole year. People pay you in late, sales could drop and suppliers want to be paid.

What is a bad debt?

Bad debt, on the other hand it is usually something that is more expensive than what you gain from it. This means that it’s unlikely boost sales, it’s not going to improve your bottom line or unlikely to enhance the overall efficiency or value of your company. For example, under certain circumstances, purchasing a new company car can be considered a bad debt. If borrowing money to buy this vehicle will lead to you being able to work harder for more people in more places or is a vehicle which you’re required to have to be able to provide the product you’ve developed, it’s an investment in value. But if it’s just a vehicle that you’re buying to have a flash new company car, and it’s not really providing any value directly to the business, that’s a bad credit.

How to determine good debt from bad debt?

In order to determine whether the business financing you’re considering will be an acceptable debt or a bad debt, it’s crucial that you crunch the numbers. It is recommended to ask yourself the following questions:

• How much can I make from the funds I borrow? What’s the chance?
• How much interest and costs will I have to pay to settle the debt?
• Are I in a better financial position in the future?
• How many years will it take to achieve that positive place?
• The money can be used in other ways to earn a higher return within a shorter time?
• Are I spending more than my means?

Consider the opportunities that investing in additional funds can bring, and if they will provide a net benefit for your company. When investing, you need to know the value you’re getting on your money. Maybe upgrading your site or shop will bring in more customers or a new piece of equipment may offer a completely new income stream. The main thing is you plan the return, the repayment timetable and your capacity. If you’re still unsure of whether finance will end up as a good or bad for your business, talk with your accountant.