Bad debt vs good debt: Learn what they are

For many, debt can be intimidating to take on however the reality is that taking on the right kind of debt will allow your business to grow and prosper. How can you figure out what kind of debt is best for business sense? It’s about looking at the value that the debt will bring to your business. What is key is comparing the benefits you anticipate to accrue from the debt (such as being able to generate more sales) versus the costs of the debt (such as fees and interest), and making sure the former is more than the latter. As long as you’re taking on debt to purchase items that are going to drive the performance and efficiency of your company, there’s generally nothing wrong with the use of debt. It can help you overcome any sudden cash flow issues you could have to face. If you have ever run the stock market, you will understand the cash flow problems that short-term businesses typically face. By partnering with a financing provider, you will help you stop any stock outs or get you the best discount of your product that is the fastest-selling.

What is good loan?

In essence, good debt allows companies to borrow capital that they would not otherwise be able to access for the purpose of increasing the amount of money they earn. Good debt is one that will aid your business in moving to the next level - it could be to buy the most expensive equipment such as delivery vehicles, or even debt to help with advertising and marketing. If you’ve earned the potential to earn a profit from that credit (bigger than the cost) then it’s likely to be a decent debt. As an example, a skin abrasion and scar management clinic’s owner obtained a small business loan to buy a new salon, renovate the facility and employ an experienced business coach. It was deemed to be a good credit. The salon was quite old and dismal. I had to bring the place and create a a beautiful space where visitors wanted to be, where it’s nice, cozy and welcoming. The good debt is also used to increase a business’s working capital and ease cash flow issues over tough or slow periods, such as the summer vacations for service-based businesses. For most people, Christmas is one of the most enjoyable seasons for the whole year. While everyone else is enjoying their time it can also turn into the most difficult business time during the entire year. When people pay you in late, sales could decrease and suppliers will want to be paid.

What is bad credit?

Bad debt, on the other hand typically is more expensive than what you gain from it. This means that it’s unlikely boost sales, it’s unlikely to increase your bottom line or unlikely to enhance the overall efficiency or value of your business. In certain circumstances, a new company car could be a bad credit. If you’re borrowing money to purchase that vehicle is going to enable you to perform more work for greater numbers of people in more locations, or it’s a vehicle that you must have in order to offer the product you’ve developed, that’s an asset to the business. However, if it’s the kind of vehicle you buy just to get a flash new company car and isn’t adding any direct value to your company, it’s a bad credit.

How to distinguish the difference between good and bad debt

When you’re trying to figure out the possibility that the business finance you’re looking at is a good or bad one, it’s essential that you crunch the numbers. He suggests that you ask yourself the following questions:

• How much money can I make from the funds I’ve borrowed? What’s the opportunity?
• How much interest and cost will I have to pay to cover the debt?
• Will I be financially secure in the long run?
• How many years will it take to get to that standing?
• Can the funds be put to use elsewhere to get a higher return within a shorter period?
• Are I spending above my budget?

It is also important to consider the opportunities that investing in additional funds will provide, and whether those opportunities will result in positive outcomes for your business. If you are investing, you must to understand the return you’re receiving on your investment. Maybe upgrading your web site or store can bring in more customers or a new piece of equipment may offer a completely new service line and revenue stream. It is important to plan the return, the repayment schedule , and your ability. If you’re unsure whether finance will end up being a great debt or a bad debt to your company, speak with your accountant.