Good debt vs bad debt: Learn what they are

For many the idea of debt is daunting to contemplate, but the reality is that having the right amount of debt can allow your company to grow and flourish. How can you figure out what kind of debt makes business sense? It’s all about looking at the long-term value of the debt will likely bring to your business. It is crucial to compare the benefits you expect to receive from the debt (such as the ability to generate more sales) as well as the expenses associated with the debt (such as fees and interest) and ensuring that you’re getting more for the latter. As long as you’re taking on debt to make purchases which will boost productivity and performance in your company, there’s no reason to avoid debt. Taking on debt can also assist in the resolution of any cash flow problems you might be facing. If you’ve ever worked in the stock market you’ll be aware of the issues of cash flow that businesses typically face. Partnering with a finance provider can provide relief to stop any stock outs or get access to the largest sale on your top-selling product.

What is good debt?

In most cases, good credit allows companies to access capital that they might not otherwise be able to access for the purpose of increasing their profits. Good debt is debt that will help your business step up to the next step - it could be for the purchase of the most expensive equipment for delivery vehicles, or even loans to assist with advertising and marketing. As long as you’ve made a return on that debt (bigger than the costs) the chances are it’s going to be a good debt. For example , a wound and scar management clinic’s owner took out a modest business loan to purchase an all-new salon, upgrade the salon and employ an expert business coach. This was deemed to be a good debt. The salon was quite outdated and in need of a makeover. I wanted to brighten the space and create a beautiful space where visitors wanted to be to, where it’s comfortable, relaxing and cozy. The good debt is also used to boost a business’s working capital and smooth out the cash flow challenges during challenging or slow periods such as the summer vacations for businesses that are service-based. For many, Christmas is among the most wonderful time during the entire year. However, when everyone other people are enjoying their holiday, it often turns into the worst time for business in the whole year. Customers pay on time, sales might decrease and suppliers will want to be paid.

What is bad debt?

Bad debt On the other hand typically is more expensive than what you get out of it. This means that it’s unlikely bring in sales, or it’s not going to improve your bottom line or it’s not likely to increase the overall value or productivity of your company. For example, under certain conditions, a new company car can be considered a bad loan. If you’re borrowing money for this vehicle will enable you to perform more work for greater numbers of people in more locations, or it’s a vehicle that you need to have in order to offer your product, then it’s an asset that adds value to your business. But if it’s just an automobile you’re purchasing to have an impressive new car for the company, and it’s not really adding any direct value for the company, that’s a bad loan.

How can you tell if you are in good debt vs bad debt

When you’re trying to figure out the possibility that the business finance you’re contemplating is a good debt or a bad one, it’s essential that you analyze the numbers. He recommends you ask yourself these questions:

• What amount of money can I make using the money I borrow? What’s my chance?
• What is the amount of interest and other costs must I pay on the amount of debt?
• Do I stand in a positive financial position in the future?
• How many years will it take to get to that position?
• Can the funds be put to use elsewhere for a better return within a shorter period?
• Are I spending more than my means?

Consider the opportunities that extra funding could provide, and whether those opportunities will result in an overall benefit to your company. When investing, you need to know the value you’re getting on your money. Maybe upgrading your website or your store will bring in more customers or a new piece of equipment can give you a new service line and revenue stream. The key is to budget the return, the repayment timetable and your capability. If you’re not sure whether finance will end up being a great debt or a bad debt for your business, speak to your accountant.