Good debt vs bad debt: Learn what they are

For many people the idea of debt is daunting to contemplate But the truth is that accepting the right type of debt could allow your business to grow and grow. So how do you work out what kind of debt makes business sense? It’s about looking at the long-term value the debt will bring to your company. The most important thing to consider is the benefits you expect to gain from borrowing (such as being able to increase sales) in comparison to the costs associated with taking on the loan (such as interest and charges) and ensuring you’re getting more for the latter. As long as you’re using the loan for purchases that are going to drive productivity and performance in your company, there’s no reason to avoid borrowing. In addition, borrowing money can help you overcome any sudden cash flow issues you may confront. If you have ever run a stock business, you will understand the issues of cash flow that companies often have to face. Working with a financial institution can provide relief to stop the stock outs and give you the best sale on your top-selling product.

What is good deben?

In essence, good debt allows a business to access capital that they might not otherwise be able to access in order to increase their returns. Good debt is one that’s going to help your business step up to the next stage - it could be to buy an expensive piece of equipment such as delivery vehicles, or even loans to assist with marketing and advertising. As long as you’ve made an income from the debt (bigger than the costs) 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 the salon a new one, remodel the premises and hire an experienced business coach. It was considered a good credit. The premises were quite old and dilapidated. I wanted to brighten them up and make it a beautiful space where people were eager to go to, where it’s comfortable, relaxing and cozy. It can also be employed to improve a company’s working capital and smooth out cash flow issues during tough or slow periods like the summer holiday season for service-based businesses. For most people, Christmas is one of the most wonderful time of the year. However, when everyone else is enjoying their time it can also turn into the worst time for business in the whole year. Customers pay on time, sales might drop and suppliers want to be paid.

What is a bad debt?

Bad debt, on the other hand is typically something that costs more than you can get from it. This means that it’s unlikely to drive sales, it’s unlikely to increase your bottom line or it’s unlikely to enhance the overall performance or value of your company. In certain circumstances, purchasing a new car for your company could be considered a bad loan. If borrowing money to buy the vehicle will enable you to work harder for the greater number of people across more places, or it’s a vehicle that you require to be able to provide an item, that’s an investment in value. But if it’s just a vehicle that you’re buying in the interest of having a flash new company car but isn’t contributing any tangible value to the business, that’s a bad loan.

How do you determine whether you have good debt vs bad debt

When it comes to determining what business financing you’re looking at is a good or bad debt, it’s vital to crunch the numbers. The expert suggests asking yourself the following questions:

• How much can I make from the funds I’ve borrowed? What’s the opportunity?
• How much interest and cost will I have to cover to settle the debt?
• Are I in a better financial position in the future?
• How many years will it take to get to that place?
• The money can be used elsewhere for a better return within a shorter amount of time?
• Am I spending beyond my means?

Consider the opportunities that investing in additional funds can provide, and whether these opportunities will bring an overall benefit to your business. When you invest, it is important to be aware of the ROI you’re receiving on your investment. Perhaps a revamp of your website or your shop can increase the number of customers you have, or a new piece or piece of equipment could provide you a whole new service line and income stream. The main thing is you plan the return, the repayment plan and your capability. If you’re unsure whether the finance you take on will end up being a good debt or bad for your business, speak with your accountant.