Bad debt vs good debt: Learn what they are

For many people it can be a daunting task to contemplate However, the truth is that taking on the right type of debt could allow your business to grow and thrive. How can you figure out what debt makes good business sense? It’s all about looking at the long-term value the debt will bring to your company. What’s important is to evaluate the benefits that you hope to gain from borrowing (such as the ability to sell more) against the cost of borrowing (such as interest and fees) as well as ensuring you’re getting more for the latter. So long as you’re taking on the debt for purchases that are going to drive efficiency and productivity in your business, then there’s nothing wrong with borrowing. In addition, borrowing money can assist in the resolution of any sudden cash flow problems you might have to face. If you’ve ever worked in the stock market and have experienced the short-term cash flow issues businesses typically face. Working with a financial institution can ease the burden of any stock sales or grant you access to the bulk offer of your most popular product.

What is good loan?

In simple terms, good debt allows an organization to access capital that they might not otherwise have access to for the purpose of increasing the returns. Good debt is one that will assist your company in moving to the next step - it could be used to purchase a big piece of kit such as delivery vehicles, or even loans to assist with marketing and advertising. As long as you’ve got some sort of return on the credit (bigger than the amount you incurred) that’s usually going to be a decent debt. For example a skin wound and scar management clinic’s proprietor took out a tiny business loan to buy a new salon, renovate the premises and hire an executive coach, which was considered to be a great debt. The location was rather old and deteriorated. I needed to freshen the place and create a a beautiful space where people wanted to come and feel cosy and inviting. The good debt is also used to boost a business’s working capital as well as smooth cash flow issues during tough or quiet times such as the summer holidays for service-based businesses. The majority of people believe that Christmas is one of the best times for the whole year. As everyone else is enjoying their time it can also turn into the most challenging business period that year. Paying customers are in late, sales could decline and suppliers would like to be paid.

What is bad credit?

Bad debt However, bad debt, is generally something that will cost you more than the benefits you earn from it. So it’s either not going to drive sales, it’s not going improve your bottom line, or not going to boost the overall value or productivity of your business. In certain conditions, a new company car can be considered a bad loan. If you’re borrowing money for the vehicle will allow you to do more work for the greater number of people across more places, or it’s a vehicle which you’re required to have for the delivery of the product you’ve developed, that’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 it’s not really providing any direct benefit to your business, then it’s an unworthy loan.

How to distinguish good debt vs bad debt

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

• How much can I make with the money I borrow? What’s the chance?
• What amount of interest and charges must I pay to cover the amount of debt?
• Will I be in a positive financial position in the long run?
• How many years will it take to achieve that positive place?
• Can the money be used elsewhere for a better return in a shorter period of time?
• Are I spending more than my budget?

Consider the opportunities that investing in additional funds can provide, and whether those opportunities will result in the net benefits for your company. When investing, you have be aware of the returns you’re getting from your investment. Maybe a new web site or store can draw more customers in, or a new piece or piece of equipment could offer a completely new revenue stream. The key is to budget the return, the repayment schedule , and your capacity. If you’re not sure what the outcome of your finance is as a good or bad debt to your company, speak with your accountant.