Good debt vs bad debt: Learn what they are

For many people the idea of debt is daunting to take on, but the reality is that taking on the right type of debt could allow your business to grow and thrive. So how do you work out which debt is good business sense? It’s all about considering the value that the debt will bring to your company. The most important thing to consider is the benefits you anticipate to receive from the debt (such as the ability to generate more sales) as well as the expenses associated with this debt (such as interest and charges) and ensuring that the former is greater than the latter. So long as you’re using the loan to finance purchases which will boost the efficiency and effectiveness of your business, then there’s usually nothing wrong with the use of debt. In addition, borrowing money can assist you in dealing with any unexpected short-term cash flow issues you could have to face. If you’ve run a stock business then you’ll know the challenges that short-term cash flow companies typically have. By partnering with a financing provider, you can provide relief to stop the stock outs and give access to the largest offer of your most popular product.

What is good credit?

In most cases, good credit allows businesses to tap into capital they wouldn’t otherwise be able to access in order to boost the amount of money they earn. Good debt is one that can aid your business in moving to the next level - it can be for buying the most expensive equipment and delivery vehicles or even loans to assist with marketing and advertising. As long as you’ve got a return on that loan (bigger than the expenses) then it’s generally going to be a great debt. For example a skin wound and scar management clinic’s proprietor took out a tiny business loan to purchase a brand new salon, refurbish the premises and hire an executive coach, which was considered a good credit. The building was old and deteriorated. I wanted to clean the space and create an inviting space that people were eager to go to, where it’s comfortable, cosy and inviting. The good debt is also used to increase a business’s working capital and smooth out cash flow issues over tough or quiet times like the summer months for businesses that specialize in service. For many, Christmas is one of the most enjoyable time for the whole year. However, when everyone other people are enjoying their holiday it can also turn into the worst business period that year. When people pay you in late, sales could decline and suppliers would like to be paid.

What is a bad credit?

Bad debt however is typically something that costs you more than what you can get from it. It’s not likely boost sales, it’s not likely to boost your bottom line or unlikely to enhance your overall productivity or value of your company. In certain circumstances, a new car for your company could be a bad debt. If you’re borrowing money to purchase that vehicle is going to enable you to provide more services to the greater number of people across more places, or it’s a vehicle that you require in order to deliver an item, it’s an asset that adds value to your business. But if it’s just a car you’re buying to have an impressive new car for the company and isn’t providing any value directly to your business, then it’s a bad credit.

How to distinguish good debt from bad debt?

When it comes to determining whether the business financing you’re contemplating is a good debt or a bad debt, it’s crucial that you crunch the numbers. He recommends you ask yourself the following questions:

• What amount of money can I make from the funds I borrow? What’s the chance?
• How much interest and cost will I be required to pay to cover the debt?
• Do I stand in a good financial position over the long term?
• How long will it take me to achieve this position?
• Can the funds be put to use elsewhere to get a higher return within a shorter time?
• Am I spending beyond my budget?

It is also important to consider the opportunities that investing in additional funds can bring, and if the opportunities you’re pursuing will yield a net benefit for your business. When investing, you have to understand the return you’re getting on your money. Maybe upgrading your website or your store will draw more customers in, or a new piece of equipment may provide you a whole new service line and income stream. The key is to set a budget for the return, the repayment timetable and your capability. If you’re still unsure of whether the finance you take on will end up as a good or bad for your company, talk with your accountant.