Bad debt vs good debt: Learn which is which

For many the idea of debt is daunting to accept however the reality is that taking on the right type of debt could allow your business to expand and grow. So , how do you figure out what kind of debt is best for business sense? It’s all about looking at the value that the debt will likely bring to your company. What’s important is to evaluate the benefits that you hope to accrue from the debt (such as being able to make more sales) in comparison to the costs associated with this debt (such as interest and charges) and ensuring that you’re getting more for the latter. So long as you’re taking on the debt to finance purchases that will improve efficiency and productivity in your company, there’s nothing wrong with taking on debt. In addition, borrowing money can assist in the resolution of any cash flow issues you could encounter. If you’ve run any stock-based business, you will understand the cash flow problems that short-term companies often have to face. Partnering with a finance provider will help you stop any stock sales or grant access to the largest offer of your most popular product.

What is good debt?

In essence, good debt allows an organization to tap into capital they wouldn’t otherwise be able to access for the purpose of increasing the returns. Good debt is debt that will assist your company in moving to the next step - it could be for the purchase of an enormous piece of equipment and delivery vehicles or even debt to help with advertising and marketing. If you’ve earned an income from the debt (bigger than the amount you incurred) then it’s likely to be a great debt. As an example, a skin abrasion and scar management clinic owner obtained a small business loan to acquire a brand new salon, refurbish the facility and employ an experienced business coach. It was considered a good debt. The location was rather old and deteriorated. I needed to freshen the place and create a the perfect place where people were eager to go to, where it’s comfortable, cosy and inviting. The good debt is also utilized to boost a company’s working capital and smooth out cash flow problems during difficult or slow periods, such as the summer holiday season for businesses that specialize in service. For most people, Christmas is one of the best occasions during the entire year. While everyone else is having a blast the holiday season can turn into the worst time for business in the whole year. Paying customers are late, sales may fall, and suppliers are eager to be paid.

What is a bad debt?

Bad debt However, bad debt it is usually something that costs you more than what you can get from it. It’s not likely boost sales, it’s unlikely to increase your bottom line, or it’s not likely to increase the overall efficiency or value of your business. For instance, in certain conditions, a new company car can be considered a bad debt. If you’re borrowing money for the car will allow you to work harder for many more people at more locations or it’s a car that you require for the delivery of the product you’ve developed, that’s a value-adding vehicle. If it’s simply a vehicle that you’re buying to have an attractive new car for your company but isn’t adding any direct value for the company, that’s an unworthy credit.

How to distinguish good debt vs bad debt

When it comes to determining what business financing you’re thinking about is a good or bad debt, it’s important that you analyze the numbers. It is recommended to ask yourself the following questions:

• How much money can I make from the funds I’ve borrowed? What’s the best way to make money?
• What is the amount of interest and other costs will I be required to pay to cover the loan?
• Will I be financially secure over the long term?
• How many years will it take to reach that positive standing?
• The money can be used elsewhere for a better return within a shorter amount of time?
• Do I spend more than my budget?

Consider the opportunities that investing in additional funds can bring, and if those opportunities will result in an overall benefit to your company. When you invest, it is important to know the value you’re getting on your money. Maybe upgrading your website or your shop can attract more customers, or a new piece or piece of equipment could provide you a whole new income stream. It is important to plan the return, the repayment plan and your capability. If you’re unsure the likelihood of finance being a good debt or bad debt for your business, speak to your accountant.