Good debt vs bad debt: Learn what they are

For many people, debt can be intimidating to consider, but the reality is that taking on the right type of debt can help your business to grow and prosper. So , how do you figure out what kind of debt is best for business sense? It’s all about looking at how long-term value it will likely bring to your company. It is crucial to compare the benefits you anticipate to receive from the debt (such as being able to sell more) against the cost of the debt (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 efficiency and productivity in your company, there’s generally nothing wrong with borrowing. Taking on debt can also assist in the resolution of any sudden cash flow issues that you might have to face. If you have ever run an investment company, you will understand the issues of cash flow that businesses often face. Partnering with a finance provider will help you stop any stock sales or grant you the best deal of your fastest-selling product.

What is good credit?

In simple terms, good debt allows a business to leverage capital they wouldn’t otherwise be able to access so that they can increase the returns. Good debt is debt that will help your business step up to the next step - it could be used to purchase an enormous piece of equipment and delivery vehicles or even to help with marketing and advertising. As long as you’ve got the potential to earn a profit from that loan (bigger than the amount you incurred) then it’s likely to be a decent debt. For example , a wound and scar management clinic’s owner took out a small business loan to buy a brand new salon, refurbish the salon and employ a business coach which was considered a good debt. The location was rather old and dismal. I wanted to clean the place and create a an attractive space where people wanted to come and feel relaxing and cozy. Good debt can also be utilized to boost a company’s working capital as well as smooth the cash flow challenges during challenging or quiet periods, such as the summer vacations for companies that provide services. For many, Christmas is among the most pleasant time for the whole year. While everyone else is having a blast, it often turns into the worst time for business of the year. People pay you late, sales may drop and suppliers want to be paid.

What is bad debt?

Bad debt however, is generally something that costs more than you get out of it. It’s not likely increase sales, 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 instance, in certain circumstances, purchasing a new company car could be a bad credit. If you’re borrowing money for the vehicle will result in you being able to provide more services to many more people at more locations, or it’s a vehicle which you’re required to have for the delivery of products, that’s an asset to the business. However, if it’s just an automobile you’re purchasing to have a flash new company car, and it’s not really providing any direct benefit to your business, then it’s an unworthy debt.

How can you tell if you are in good debt from bad debt?

In order to determine whether the business financing you’re looking at is an acceptable debt or a bad debt, it’s important to calculate the numbers. The expert suggests asking yourself the following questions:

• What is the maximum amount I can earn from the money I’ve borrowed? What’s the best way to make money?
• What is the amount of interest and other costs will I have to pay for the amount of debt?
• Will I be in a better financial position in the long run?
• How long will it take me to achieve that positive position?
• Can the funds be put to use in other ways to earn a higher return in a shorter period of time?
• Am I spending beyond my budget?

Consider the opportunities that extra funding could provide, and whether those opportunities will result in a net benefit for your company. If you are investing, you must to know the value you’re getting from your investment. Maybe a new web site or store can bring in more customers or a new piece of equipment may offer a completely new service line and income stream. The most important thing is to plan the return, the repayment schedule , and your capacity. If you’re still unsure of the likelihood of finance being a good debt or a bad debt for your business, talk to your accountant.