Bad debt vs good debt: Learn what they are

For many the idea of debt is daunting to contemplate However, the truth is that taking on the right kind of debt can help your business to expand and prosper. How do you figure out what kind of debt is best for business sense? It’s all about looking at the long-term value of the debt will likely bring to your business. What’s important is to evaluate the benefits you expect to gain from borrowing (such as being able to sell more) versus the costs of the debt (such as interest and fees) and ensuring the former is more than the latter. So long as you’re using the debt to make purchases that are going to drive productivity and performance in your business, then there’s generally nothing wrong with debt. The use of debt can assist in the resolution of any sudden cash flow problems you might encounter. If you’ve ever worked in any stock-based business, you will understand the short-term cash flow issues companies often have to face. Working with a financial institution will help you stop any stock-outs, or give you access to the bulk sale on your top-selling product.

What is good debt?

In the end, good debt permits businesses to tap into capital they wouldn’t otherwise be able to access so that they can increase the amount of money they earn. Good debt is debt that will help your business step up to the next level - it can be for buying an enormous piece of equipment and delivery vehicles or even loans to assist with advertising and marketing. If you’ve earned a return on that credit (bigger than the costs) then it’s likely to be a great debt. For example , a wound and scar management clinic’s owner obtained a small business loan to purchase the salon a new one, remodel the premises and hire an experienced business coach. It was deemed to be a good credit. The building was old and deteriorated. I needed to freshen the place and create a an attractive space where people were eager to go and feel cosy and inviting. Good debt can also be employed to improve a company’s working capital, and to smooth out cash flow issues over tough or slow periods like the summer holidays for businesses that are service-based. For many, Christmas is one of the most pleasant seasons for the whole year. However, when everyone else is enjoying their time, it often turns into the most difficult business time of the year. When people pay you in late, sales could decline and suppliers would like to be paid.

What is bad credit?

Bad debt, on the other hand it is usually something that costs more than you get out of it. Therefore, it’s likely not bring in sales, or it’s not going to improve your bottom line or it’s unlikely to enhance the overall performance or value of your business. For instance, in certain conditions, a brand new car for your company could be a bad credit. If you’re borrowing money to purchase this vehicle will result in you being able to provide more services to more people in more places or is a vehicle which you’re required to have for the delivery of products, it’s an asset that adds value to your business. But if it’s just the kind of vehicle you buy just to get a brand new corporate car and isn’t providing any direct benefit to your business, then it’s a bad debt.

How to distinguish the difference between bad and good debt

When it comes to determining what business financing you’re looking at is a good or bad debt, it’s vital to calculate the numbers. It is recommended to ask yourself these questions:

• What amount of money can I make with the money I borrow? What’s the opportunity?
• How much interest and cost will I have to cover to settle the amount of debt?
• Do I stand in a good financial position in the future?
• How much time will it take me to achieve that positive situation?
• Can the funds be put to use elsewhere for a better return within a shorter amount of time?
• Am I spending beyond my budget?

It is also important to consider the potential benefits that funding will provide, and whether those opportunities will result in positive outcomes for your business. When you invest, it is important be aware of the returns you’re getting on your money. Perhaps upgrading your website or your shop can attract more customers or a new piece of equipment could provide you a whole new income stream. The main thing is you budget the return, the repayment schedule and the capacity of your business. If you’re still uncertain whether the finance you take on will end up as a good or bad debt for your business, talk with your accountant.