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

For many the idea of debt is daunting to consider But the truth is that having the right amount of debt will allow your company to grow and prosper. So , how do you figure out which debt is good business sense? It’s about looking at the long-term value of the debt is likely to add to your business. It is crucial to compare the benefits that you hope to receive from the debt (such as being able to increase sales) as well as the expenses associated with this debt (such as interest and fees), and making sure the former is greater than the latter. If you’re using the debt to purchase items that are going to drive efficiency and productivity in your business, then there’s generally nothing wrong with taking on debt. Taking on debt can also aid in overcoming any unexpected short-term cash flow issues you may be facing. If you have ever run a stock business then you’ll know the short-term cash flow issues businesses typically face. Working with a financial institution can help stop any stock sales or grant you access to the bulk sale on your top-selling product.

What is good debt?

In essence, good debt allows businesses to access capital that they might not otherwise have access to for the purpose of increasing the amount of money they earn. Good debt is debt which will assist your company in moving to the next step - it can be for buying the most expensive equipment, getting delivery vehicles or even debt to help in marketing and advertising. As long as you’ve made a return on that loan (bigger than the costs) then it’s likely to be a great debt. As an example, a skin abrasion and scar management clinic’s owner took out a small business loan to acquire a brand new salon, refurbish the salon and employ a business coach which was considered good credit. The salon was quite old and dilapidated. I needed to freshen them up and make it an inviting space that visitors wanted to be in, where it’s warm, cozy and welcoming. The good debt is also utilized to boost a company’s working capital as well as smooth cash flow problems during difficult or quiet periods, such as the summer months for businesses that are service-based. For many, Christmas is one of the best seasons during the entire year. However, when everyone other people are enjoying their holiday this can be the worst business period in the whole year. Paying customers are late, sales may decline and suppliers would like to be paid.

What is bad credit?

Bad debt However, bad debt is typically something that costs more than you gain from it. Therefore, it’s likely not boost sales, it’s not going to improve your bottom line, or it’s not going to improve the overall value or productivity of your business. For instance, in certain circumstances, a new company car can be considered a bad loan. If you’re borrowing money to purchase this vehicle will enable you to work harder for more people in more places or is a vehicle that you require for the delivery of products, it’s an asset that adds value to your business. If it’s simply the kind of vehicle you buy to have a brand new corporate car but isn’t providing any direct benefit to the business, that’s a bad loan.

How do you determine whether you have the difference between bad and good debt

When it comes to determining whether the business finance you’re looking at is an acceptable debt or a bad debt, it’s crucial that you analyze the numbers. He suggests that you ask yourself the following questions:

• What is the maximum amount I can make with the money I borrow? What’s my chance?
• What is the amount of interest and other costs will I have to cover to settle the debt?
• Will I be financially secure over the long term?
• How do I have to wait to achieve this place?
• The money can be used elsewhere for a better return in a shorter period of time?
• Do I spend more than my budget?

It is also important to consider the possibilities that additional funding can provide, and whether those opportunities will result in positive outcomes for your company. When investing, you need to be aware of the ROI you’re getting from your investment. Maybe upgrading your site or shop will draw more customers in or a brand new piece of equipment could offer a completely new service line and revenue stream. The main thing is you plan the return, the repayment plan and your capability. If you’re still unsure of whether the finance you take on will end up as a good or bad debt to your company, speak to your accountant.