Bad debt vs good debt: Learn which is which

For many the idea of debt is daunting to contemplate however the reality is that having the right amount of debt could allow your business to expand and grow. How can you figure out which debt is good business sense? It’s about looking at the value that the debt is likely to add to your business. What is key is comparing the benefits you anticipate to receive from the debt (such as being able to sell more) against the cost of this debt (such as fees and interest) as well as ensuring you’re getting more for the latter. So long as you’re taking on the debt for purchases that can improve efficiency and productivity in your business, then there’s no reason to avoid debt. The use of debt can help you overcome any short-term cash flow issues that you might have to face. If you’ve ever worked in the stock market you’ll be aware of the short-term cash flow issues businesses typically face. Partnering with a finance provider can ease the burden of any stock-outs, or give access to the largest offer of your most popular product.

What is good credit?

In the end, good debt permits an organization to tap into capital they wouldn’t otherwise have access to for the purpose of increasing their profits. Good debt is one that will help your business step up to the next stage - it can be for buying an expensive piece of equipment such as delivery vehicles, or even debt to help with marketing and advertising. As long as you’ve made an income from the loan (bigger than the amount you incurred) then it’s likely to be a decent debt. For example , a wound and scar management clinic’s proprietor took out a tiny business loan to buy the salon a new one, remodel the salon and employ a business coach which was deemed to be a good debt. The salon was quite old and dismal. I needed to freshen them up and make it an attractive space where visitors wanted to be, where it’s nice, cosy and inviting. The good debt is also used to boost a business’s working capital and smooth out cash flow issues over tough or quiet times like the summer vacations for service-based businesses. For most people, Christmas is among the most pleasant times in the calendar. As everyone else is enjoying their time the holiday season can turn into the most challenging business period during the entire year. When people pay you on time, sales might fall, and suppliers are eager to be paid.

What is bad credit?

Bad debt On the other hand typically costs more than you can get from it. This means that it’s unlikely to drive sales, it’s not going to improve your bottom line, or it’s not going to improve the overall performance or value of your company. For example, under certain circumstances, a new company car can be a bad credit. If you’re borrowing money to purchase the vehicle will allow you to work harder for greater numbers of people in more locations and it’s a vehicle that you require to be able to provide products, it’s an asset that adds value to your business. If it’s simply the kind of vehicle you buy to have a flash new company car, and it’s not really providing any value directly to your business, then it’s an unworthy loan.

How to determine good debt vs bad debt

In order to determine what business financing you’re considering will be an acceptable debt or a bad debt, it’s important to crunch the numbers. It is recommended to ask yourself the following questions:

• What is the maximum amount I can earn from the money I’ve borrowed? What’s the chance?
• How much interest and costs will I have to cover to cover the credit?
• Do I stand in a better financial position over the long term?
• How do I have to wait to reach that positive place?
• Can the funds be put to use elsewhere to get a higher return within a shorter amount of time?
• Are I spending more than my budget?

Consider the opportunities that investing in additional funds can bring, and if they will provide a net benefit for your company. When you invest, it is important be aware of the returns you’re earning on your investment. Perhaps a revamp of your site or shop will attract more customers or a brand new piece or piece of equipment could provide you a whole new service line and income stream. It is important to prepare the return in advance, as well as the repayment plan and your ability. If you’re not sure the likelihood of finance as a good or bad for your business, speak to your accountant.