Good debt vs bad debt: Learn which is which

For many it can be a daunting task to consider however the reality is that accepting the right type of debt can allow your business to expand and prosper. So , how do you figure out what debt makes good business sense? It’s all about looking at the value that the debt is likely to add to your company. What’s important is to evaluate the benefits you’re hoping to reap from the debt (such as being able to increase sales) against the cost of the debt (such as interest and charges) as well as ensuring the former is larger than the latter. If you’re using the loan to finance purchases that can improve efficiency and productivity in your company, there’s generally nothing wrong with borrowing. Taking on debt can also assist you in dealing with any sudden cash flow issues that you might be facing. If you’ve ever worked in an investment company then you’ll know the issues of cash flow that businesses often face. By partnering with a financing provider, you can help stop the stock outs and give you access to the biggest deal of your fastest-selling product.

What is good loan?

In simple terms, good debt allows a business to leverage capital they wouldn’t otherwise be able to access for the purpose of increasing the amount of money they earn. Good debt is one which will assist your company in moving to the next level - it could be to buy a big piece of kit for delivery vehicles, or even debt to help in marketing and advertising. As long as you’ve made an income from the debt (bigger than the cost) then it’s generally going to be a good debt. For instance, a skin wound and scar management clinic’s owner took out a small business loan to acquire an all-new salon, upgrade the premises , and also hire an executive coach, which was deemed to be a good debt. The building was old and deteriorated. I needed to freshen the space and create the perfect place where visitors wanted to be to, where it’s comfortable, homey and warm. The good debt is also utilized to boost a company’s working capital as well as smooth cash flow problems during difficult or quiet times like the summer holidays for companies that provide services. For many, Christmas is among the most enjoyable time during the entire year. Unfortunately, as everyone else is having a blast, it often turns into the most difficult business time of the year. When people pay you late, sales may decline and suppliers would like to be paid.

What is a bad debt?

Bad debt however it is usually something that costs you more than what you earn from it. It’s not likely to drive sales, it’s not going to improve your bottom line or it’s not likely to increase your overall productivity or value of your company. For example, under certain circumstances, purchasing a new company car could be considered a bad debt. If borrowing money to buy that vehicle is going to lead to you being able to work harder for the greater number of people across more places and it’s a vehicle that you require to be able to provide an item, it’s an asset that adds value to your business. But if it’s just a vehicle that you’re buying in the interest of having an attractive new car for your company, and it’s not really adding any direct value to your company, it’s an unworthy loan.

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

When it comes to determining what business financing you’re thinking about is an acceptable debt or a bad one, it’s essential that you crunch the numbers. The expert suggests asking yourself the following questions:

• What amount of money can I earn from the money I’ve borrowed? What’s the chance?
• How much interest and costs will I have to cover to settle the amount of debt?
• Are I in a good financial position in the future?
• How do I have to wait to achieve this position?
• Can the money be used elsewhere to get a higher return within a shorter amount of time?
• Do I spend more than my means?

You should also consider the potential benefits that funding will provide, and whether those opportunities will result in the net benefits for your company. When investing, you need be aware of the returns you’re receiving on your investment. Maybe upgrading your website or your shop can bring in more customers or a brand new piece of equipment can offer a completely new income stream. It is important to plan the return, the repayment schedule and your capacity. If you’re unsure whether finance will end up being a great debt or a bad debt to your company, speak to your accountant.