Good debt vs bad debt: How to know which is which

For many they find debt to be daunting to take on however the reality is that taking on the right kind of debt can help your business to expand and grow. How can you figure out which debt is good business sense? It’s all about assessing the long-term value of the debt will likely bring to your business. It is crucial to compare the benefits that you hope to reap from the debt (such as the ability to generate more sales) as well as the expenses associated with borrowing (such as fees and interest), and making sure you’re getting more for the latter. So long as you’re taking on debt to finance purchases that will improve efficiency and productivity in your business, then there’s usually nothing wrong with taking on debt. It can assist you in dealing with any unexpected short-term cash flow problems you might have to face. If you have ever run an investment company you’ll be aware of the challenges that short-term cash flow businesses often face. Partnering with a finance provider will help you stop any stock outs or get you access to the biggest sale on your top-selling product.

What is good credit?

In simple terms, good debt allows an organization to borrow capital that they would not otherwise be able to access so that they can increase the amount of money they earn. Good debt is debt that’s going to aid your business in moving to the next level . it could be used to purchase an enormous piece of equipment, getting delivery vehicles or even loans to assist with advertising and marketing. If you’ve earned a return on that debt (bigger than the amount you incurred) that’s usually going to be a good debt. As an example, a skin abrasion and scar management clinic’s owner obtained a small business loan to purchase an all-new salon, upgrade the facility and employ an expert business coach. This was considered good credit. The building was outdated and in need of a makeover. I had to bring them up and make an inviting space that visitors wanted to be and feel relaxing and cozy. Good debt can also be used to increase a business’s working capital and smooth out the cash flow challenges during challenging or quiet times for instance, like the summer vacations for companies that provide services. For the majority of people, Christmas is one of the best times in the calendar. As everyone else is having a blast the holiday season can turn into the most challenging business period in the whole year. When people pay you late, sales can decline and suppliers would like to be paid.

What is bad debt?

Bad debt On the other hand is typically something that will cost you more than the benefits you can get from it. So it’s either not going boost sales, it’s not likely to boost your bottom line, or unlikely to enhance the overall value or productivity of your company. For example, under certain conditions, a new car for your company could be considered a bad loan. If borrowing money to buy the vehicle will result in you being able to perform more work for the greater number of people across more places or is a vehicle which you’re required to have for the delivery of products, that’s a value-adding vehicle. However, if it’s just a vehicle that you’re buying just to get an attractive new car for your company, and it’s not really adding any direct value to your business, then it’s an unworthy debt.

How to determine good debt from bad debt?

When it comes to determining whether the business finance you’re contemplating is an acceptable debt or a bad debt, it’s vital to crunch the numbers. It is recommended to ask yourself these questions:

• How much money can I make using the money I borrow? What’s the chance?
• How much interest and cost will I have to cover to settle the amount of debt?
• Are I in a better financial position over the long term?
• How much time will it take me to reach that positive place?
• Can the funds be put to use to purchase other products for better returns within a shorter period?
• Do I spend more than my means?

It is also important to consider the opportunities that investing in additional funds can bring, and if the opportunities you’re pursuing will yield an overall benefit to your company. When investing, you need to know the value you’re receiving on your investment. Maybe upgrading your website or your store will bring in more customers, or a new piece of equipment could give you a new service line and revenue stream. The main thing is you prepare the return in advance, as well as the repayment schedule and your capability. If you’re still uncertain the likelihood of finance as a good or bad for your company, talk to your accountant.