Bad debt vs good debt: Learn what they are

For many, debt can be intimidating to accept, but the reality is that accepting the right type of debt can allow your business to expand and grow. How can you figure out what debt makes good business sense? It’s about looking at how long-term value it is likely to bring to your company. It is crucial to compare the benefits you’re hoping to receive from the debt (such as being able to increase sales) as well as the expenses associated with borrowing (such as fees and interest), and making sure the former is more than the latter. If you’re taking on debt to purchase items that are going to drive the efficiency and effectiveness of your company, there’s generally nothing wrong with taking on debt. Taking on debt can also assist you in dealing with any unexpected short-term cash flow issues that you might confront. If you’ve run any stock-based business you’ll be aware of the cash flow problems that short-term businesses typically face. Working with a financial institution can provide relief to stop the stock outs and give you access to the biggest sale on your top-selling product.

What is good debt?

In most cases, good credit allows a business to access capital that they might not otherwise have access to in order to increase the returns. Good debt is debt which will help your business step up to the next level . it can be for buying a big piece of kit such as delivery vehicles, or even loans to assist with marketing and advertising. As long as you’ve made an income from the credit (bigger than the amount you incurred) the chances are it’s going to be a good debt. For instance, a skin wound and scar management clinic’s proprietor took out a tiny 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 debt. The location was rather old and deteriorated. I wanted to brighten them up and make it the perfect place where visitors wanted to be to, where it’s comfortable, relaxing and cozy. The good debt is also used to increase a business’s working capital as well as smooth cash flow issues during tough or quiet times like the summer holidays for companies that provide services. For many, Christmas is among the most enjoyable occasions in the calendar. However, when everyone else is enjoying their time this can be the most difficult business time in the whole year. Paying customers are on time, sales might drop and suppliers want to be paid.

What is bad credit?

Bad debt however typically is more expensive than what you get out of it. So it’s either not going boost sales, it’s not likely to boost your bottom line, or it’s not likely to increase the overall performance or value of your business. In certain conditions, a company vehicle that is new could be a bad credit. If you borrow money to purchase that vehicle is going to result in you being able to provide more services to many more people at more locations or it’s a car that you must have in order to deliver the product you’ve developed, it’s an investment in value. If it’s simply an automobile you’re purchasing to have an impressive new car for the company but isn’t providing any direct benefit to your business, then it’s an unworthy debt.

How to determine good debt vs bad debt

In order to determine what business financing you’re contemplating is an acceptable debt or a bad debt, it’s vital that you analyze the numbers. It is recommended to ask yourself these questions:

• What amount of money can I earn from the money I borrow? What’s the chance?
• How much interest and costs will I be required to pay to cover the amount of debt?
• Are I in a positive financial position over the long term?
• How many years will it take to achieve that positive standing?
• Could the money be utilized in other ways to earn a higher return within a shorter time?
• Am I spending beyond my means?

Consider the opportunities that extra funding could provide, and whether those opportunities will result in positive outcomes for your company. When investing, you need to be aware of the ROI you’re getting on your money. Perhaps a revamp of your site or shop will draw more customers in, or a new piece of equipment could give you a new income stream. It is important to budget the return, the repayment plan and your ability. If you’re unsure the likelihood of finance being a great debt or bad for your business, talk to your accountant.