Good debt vs bad debt: Learn what they are

For many the idea of debt is daunting to take on However, the truth is that accepting the right type of debt can allow your business to grow and prosper. How do you figure out what kind of debt makes business sense? It’s all about assessing the long-term value of the debt will likely bring to your company. It is crucial to compare the benefits you anticipate to gain from borrowing (such as being able to generate more sales) against the cost of borrowing (such as fees and interest) as well as ensuring the former is more than the latter. So long as you’re taking on the debt to make purchases which will boost productivity and performance in your company, there’s generally nothing wrong with the use of debt. In addition, borrowing money can aid in overcoming any sudden cash flow issues you may encounter. If you have ever run a stock business, you will understand the cash flow problems that short-term businesses often face. By partnering with a financing provider, you can help stop the stock outs and give you the best deal of your fastest-selling product.

What is good loan?

In the end, good debt permits businesses to leverage capital they wouldn’t otherwise have access to in order to boost their returns. Good debt is one that’s going to assist your company in moving to the next step - it could be for the purchase of an enormous piece of equipment such as delivery vehicles, or even to help with marketing and advertising. If you’ve earned some sort of return on the loan (bigger than the cost) the chances are it’s going to be considered a good loan. For example a skin wound and scar management clinic’s proprietor took out a tiny business loan to acquire a new salon, renovate the premises and hire an expert business coach. This was considered to be a great debt. The premises were quite old and dismal. I wanted to brighten them up and make a beautiful space where people wanted to come to, where it’s comfortable, relaxing and cozy. The good debt is also utilized to boost a company’s working capital and smooth out the cash flow challenges during challenging or slow periods like the summer holidays for service-based businesses. The majority of people believe that Christmas is one of the most enjoyable times of the year. However, when everyone other people are enjoying their holiday this can be the most challenging business period of the year. When people pay you on time, sales might decline and suppliers would like to be paid.

What is bad debt?

Bad debt however is typically something that costs you more than what you gain from it. Therefore, it’s likely not increase sales, it’s not going improve your bottom line or it’s unlikely to enhance the overall efficiency or value of your company. For example, under certain conditions, a brand new car for your company could be considered a bad loan. If you’re borrowing money to purchase the vehicle will result in you being able to perform more work for many more people at more locations or is a vehicle that you require in order to offer your product, then that’s a value-adding vehicle. However, if it’s a vehicle that you’re buying to have an impressive new car for the company, and it’s not really contributing any tangible value to your business, then it’s an unworthy debt.

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

When it comes to determining the possibility that the business finance you’re thinking about is a good debt or a bad debt, it’s crucial to crunch the numbers. He suggests that you ask yourself these questions:

• How much money can I make from the funds I borrow? What’s the opportunity?
• How much interest and cost will I be required to pay to settle the debt?
• Will I be in a positive financial position in the future?
• How do I have to wait to achieve this position?
• Can the funds be put to use elsewhere to get a higher return within a shorter time?
• Do I spend more than my budget?

Consider the possibilities that additional funding will provide, and whether the opportunities you’re pursuing will yield an overall benefit to your business. When investing, you need to understand the return you’re receiving on your investment. Maybe a new web site or store can bring in more customers or a brand new piece of equipment could give you a new revenue stream. The key is to set a budget for the return, the repayment timetable and your capacity. If you’re not sure the likelihood of finance being a great debt or bad debt for your business, speak with your accountant.