Good debt vs bad debt: Learn which is which

For many the idea of debt is daunting to take on But the truth is that having the right amount of debt could allow your business to grow and grow. So , how do you figure out which debt is good business sense? It’s all about looking at how long-term value it is likely to bring to your company. What’s important is to evaluate the benefits you expect to gain from borrowing (such as the ability to generate more sales) in comparison to the costs associated with taking on the loan (such as fees and interest), and making sure the former is larger than the latter. So long as you’re taking on debt to finance purchases that are going to drive productivity and performance in your company, there’s no reason to avoid taking on debt. The use of debt can help you overcome any short-term cash flow issues you may be facing. If you have ever run a stock business you’ll be aware of the challenges that short-term cash flow companies often have to face. Working with a financial institution will help you stop the stock outs and give you access to the bulk deal of your fastest-selling product.

What is good loan?

In simple terms, good debt allows businesses to borrow capital that they would not otherwise be able to access for the purpose of increasing the amount of money they earn. Good debt is one which will assist your company in moving to the next step - it could be used to purchase a big piece of kit and delivery vehicles or even debt to help with advertising and marketing. If you’ve earned some sort of return on the loan (bigger than the amount you incurred) then it’s generally going to be a good debt. For example , a wound and scar management clinic owner obtained a small business loan to acquire the salon a new one, remodel the premises , and also hire an executive coach, which was considered to be a great credit. The premises were quite old and dismal. I needed to freshen them up and make an attractive space where people were eager to go in, where it’s warm, relaxing and cozy. Good debt can also be used to boost a business’s working capital and ease cash flow issues during tough or quiet times like the summer holidays for companies that provide services. The majority of people believe that Christmas is one of the best seasons for the whole year. As everyone else is enjoying their time the holiday season can turn into the most difficult business time that year. Paying customers are on time, sales might drop and suppliers want to be paid.

What is a bad debt?

Bad debt, on the other hand, is generally something that is more expensive than what you can get from it. So it’s either not going boost sales, it’s unlikely to increase your bottom line, or not going to boost the overall performance or value of your company. In certain circumstances, a new car for your company could be considered a bad debt. If you’re borrowing money for the vehicle will enable you to work harder for more people in more places or is a vehicle which you’re required to have in order to offer an item, that’s an asset to the business. If it’s simply the kind of vehicle you buy just to get a flash new company car and isn’t providing any direct benefit to your business, then it’s an unworthy debt.

How to distinguish the difference between bad and good debt

In order to determine what business financing you’re contemplating is a good or bad debt, it’s important that you analyze the numbers. He suggests that you ask yourself the following questions:

• What is the maximum amount I can make with the money I’ve borrowed? What’s the chance?
• How much interest and cost will I have to cover on the credit?
• Do I stand financially secure over the long term?
• How much time will it take me to achieve that positive standing?
• Could the money be utilized elsewhere for a better return in a shorter period of time?
• Am I spending beyond my means?

Also, you should consider the potential benefits that funding can bring, and if these opportunities will bring an overall benefit to your business. When investing, you need to be aware of the ROI you’re earning on your investment. Perhaps a revamp of your web site or store can increase the number of customers you have or a new piece or piece of equipment could give you a new income stream. The main thing is you set a budget for the return, the repayment timetable and the capacity of your business. If you’re still unsure of what the outcome of your finance is as a good or a bad debt for your business, speak with your accountant.