Good debt vs bad debt: Learn what they are

For many people, debt can be intimidating to contemplate however the reality is that taking on the right type of debt can allow your business to expand and flourish. How can you figure out what kind of debt makes business sense? It’s all about looking at the value that the debt will bring to your company. What is key is comparing the benefits you’re hoping to reap from the debt (such as being able to sell more) as well as the expenses associated with borrowing (such as fees and interest) and ensuring the former is larger than the latter. If you’re taking on the debt to purchase items that are going to drive the efficiency and effectiveness of your company, there’s no reason to avoid taking on debt. In addition, borrowing money can help you overcome any cash flow issues that you might encounter. If you’ve ever worked in a stock business, you will understand the issues of cash flow that businesses often face. A partnership with a finance company can help stop any stock outs or get you access to the biggest sale on your top-selling product.

What is good credit?

In the end, good debt permits a business to access capital that they might not otherwise be able to access in order to increase the returns. Good debt is one that can aid your business in moving to the next stage - it could be to buy the most expensive equipment such as delivery vehicles, or even debt to help in marketing and advertising. As long as you’ve got an income from the debt (bigger than the amount you incurred) that’s usually going to be a good debt. For example a skin wound and scar management clinic’s owner took out a modest business loan to acquire a new salon, renovate the premises , and also hire a business coach which was considered a good debt. The building was old and deteriorated. I wanted to brighten the place and create a a beautiful space where visitors wanted to be, where it’s nice, relaxing and cozy. It can also be used to boost a business’s working capital and smooth out cash flow issues during tough or slow times, such as the summer holiday season for businesses that are service-based. For most people, Christmas is among the most pleasant times of the year. However, when everyone else is enjoying their time, it often turns into the most challenging business period in the whole year. Customers pay late, sales can drop and suppliers want to be paid.

What is a bad credit?

Bad debt, on the other hand is typically something that will cost you more than the benefits you gain from it. It’s not likely boost sales, it’s not likely to boost your bottom line or not going to boost your overall productivity or value of your business. In certain circumstances, purchasing a company vehicle that is new could be considered a bad loan. If you’re borrowing money to purchase this vehicle will allow you to provide more services to greater numbers of people in more locations, or it’s a vehicle that you require in order to offer the product you’ve developed, it’s an asset that adds value to your business. However, if it’s an automobile you’re purchasing just to get an impressive new car for the company but isn’t adding any direct value to the business, that’s a bad credit.

How to determine the difference between good and bad debt

In order to determine what business financing you’re contemplating is a good or bad debt, it’s important that you crunch the numbers. He recommends you ask yourself the following questions:

• How much money can I make using the money I borrow? What’s the opportunity?
• What amount of interest and charges will I have to pay to cover the amount of debt?
• Do I stand in a good financial position over the long term?
• How do I have to wait to achieve that positive place?
• Can the money be used in other ways to earn a higher return within a shorter time?
• Am I spending beyond my means?

You should also consider the possibilities that additional funding can provide, and whether these opportunities will bring the net benefits for your business. When you invest, it is important to understand the return you’re getting from your investment. Perhaps upgrading your website or your shop can attract more customers or a brand new piece of equipment can give you a new revenue stream. The most important thing is to plan the return, the repayment timetable and your capability. If you’re still unsure of what the outcome of your finance is being a great debt or bad debt to your company, speak to your accountant.