Bad debt vs good debt: Learn which is which

For many they find debt to be daunting to consider, but the reality is that taking on the right kind of debt can help your company to grow and thrive. How do you figure out what kind of debt is best for business sense? It’s all about looking at the value that the debt will likely bring to your business. What’s important is to evaluate the benefits you expect to reap from the debt (such as the ability to generate more sales) versus the costs of taking on the loan (such as interest and fees) and ensuring you’re getting more for the latter. If you’re using the loan to make purchases that are going to drive efficiency and productivity in your company, there’s usually nothing wrong with debt. In addition, borrowing money can aid in overcoming any sudden cash flow issues that you might encounter. If you’ve run an investment company and have experienced the challenges that short-term cash flow businesses typically face. Working with a financial institution can help stop any stock sales or grant you access to the bulk discount of your product that is the fastest-selling.

What is good deben?

In the end, good debt permits an organization to access capital that they might not otherwise have access to for the purpose of increasing their profits. Good debt is debt that will enable your business to move to the next level - it can be for buying an enormous piece of equipment such as delivery vehicles, or even loans to assist with advertising and marketing. As long as you’ve got the potential to earn a profit from that loan (bigger than the amount you incurred) that’s usually going to be considered a good loan. For example a skin wound and scar management clinic owner obtained a small business loan to acquire an all-new salon, upgrade the facility and employ a business coach which was considered a good debt. The salon was quite old and dismal. I needed to freshen the place and create a an inviting space that people wanted to come to, where it’s comfortable, cozy and welcoming. The good debt is also utilized to boost a company’s working capital, and to smooth out cash flow problems during difficult or slow periods like the summer months for companies that provide services. For most people, Christmas is one of the most enjoyable times during the entire year. Unfortunately, as everyone else is enjoying themselves it can also turn into the worst business period during the entire year. Customers pay late, sales may decline and suppliers would like to be paid.

What is bad debt?

Bad debt On the other hand it is usually something that costs more than you gain from it. It’s not likely 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 company. In certain conditions, a brand new car for your company could be a bad debt. If you’re borrowing money to purchase this vehicle will enable you to work harder for greater numbers of people in more locations or is a vehicle that you require for the delivery of products, it’s an asset that adds value to your business. However, if it’s a car you’re buying just to get an attractive new car for your company, and it’s not really providing any direct benefit to the business, that’s a bad loan.

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

When you’re trying to figure out whether the business financing you’re contemplating is an acceptable debt or a bad debt, it’s vital to calculate the numbers. The expert suggests asking yourself these questions:

• How much can I earn from the money I’ve borrowed? What’s the chance?
• What is the amount of interest and other costs must I pay for the credit?
• Will I be in a good financial position in the long run?
• How do I have to wait to achieve this situation?
• Can the money be used elsewhere for a better return within a shorter period?
• Am I spending beyond my budget?

Consider the possibilities that additional funding can bring, and if the opportunities you’re pursuing will yield a net benefit for your company. When investing, you need to be aware of the ROI you’re getting from your investment. Maybe a new website or your shop can increase the number of customers you have, or a new piece of equipment may provide you a whole new income stream. The main thing is you plan the return, the repayment timetable and the capacity of your business. If you’re still uncertain whether finance will end up being a good debt or a bad debt for your business, talk to your accountant.