Good debt vs bad debt: How to know what they are

For many people, debt can be intimidating to take on But the truth is that taking on the right type of debt can help your business to expand and grow. 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 accrue from the debt (such as being able to generate more sales) versus the costs of taking on the loan (such as interest and charges), and making sure the former is greater than the latter. So long as you’re taking on the debt to purchase items that will improve the performance and efficiency of your business, then there’s usually nothing wrong with debt. Taking on debt can also assist in the resolution of any sudden cash flow issues you could have to face. If you’ve ever had the opportunity to run the stock market then you’ll know the issues of cash flow that businesses often face. Partnering with a finance provider can provide relief to stop any stock sales or grant you access to the biggest discount of your product that is the fastest-selling.

What is good credit?

In most cases, good credit allows businesses to leverage capital they wouldn’t otherwise have access to in order to boost their returns. Good debt is one which will assist your company in moving to the next stage - it could be for the purchase of a big piece of kit and delivery vehicles or even to help with advertising and marketing. If you’ve earned a return on that credit (bigger than the costs) the chances are it’s going to be a good debt. For instance, a skin wound and scar management clinic owner took out a small business loan to acquire a brand new salon, refurbish the premises and hire an expert business coach. This was considered a good credit. The salon was quite old and dilapidated. I needed to freshen them up and make an inviting space that visitors wanted to be to, where it’s comfortable, relaxing and cozy. The good debt is also employed to improve a company’s working capital as well as smooth cash flow issues over tough or quiet periods for instance, like the summer months for service-based businesses. For the majority of people, Christmas is one of the most pleasant times for the whole year. As everyone else is enjoying their time the holiday season can turn into the worst business period of the year. Paying customers are on time, sales might fall, and suppliers are eager to be paid.

What is bad credit?

Bad debt however typically is more expensive than what you gain from it. This means that it’s unlikely boost sales, it’s not going improve your bottom line, or it’s not likely to increase your overall productivity or value of your company. For instance, in certain conditions, a brand new car for your company could be considered a bad loan. If you borrow money to purchase the car will enable you to perform more work for greater numbers of people in more locations or is a vehicle that you must have in order to deliver an item, that’s an asset to the business. But if it’s just the kind of vehicle you buy for the sake of having a flash new company car and isn’t providing any direct benefit for the company, that’s a bad credit.

How to determine the difference between bad and good debt

When it comes to determining whether the business finance you’re looking at is an excellent debt or a bad debt, it’s crucial to crunch the numbers. It is recommended to ask yourself the following questions:

• How much can I earn from the money I borrow? What’s my chance?
• What amount of interest and charges will I have to cover to cover the debt?
• Do I stand in a positive financial position over the long term?
• How many years will it take to get to that position?
• The money can be used elsewhere for a better return within a shorter time?
• Do I spend more than my means?

Consider the possibilities that additional funding can bring, and if they will provide positive outcomes for your business. When investing, you need to understand the return you’re receiving on your investment. Maybe a new website or your store will attract more customers, or a new piece of equipment could provide you a whole new service line and revenue stream. The main thing is you prepare the return in advance, as well as the repayment timetable and your ability. If you’re still unsure of what the outcome of your finance is being a good debt or bad to your company, speak to your accountant.