Bad debt vs good debt: How to identify what they are

For many it can be a daunting task to take on however the reality is that accepting the right type of debt can allow your business to expand and flourish. So , how do you figure out what kind of debt makes business sense? It’s about looking at the long-term value the debt is likely to bring to your company. It is crucial to compare the benefits you’re hoping to gain from borrowing (such as being able to generate more sales) versus the costs of the debt (such as interest and charges) as well as ensuring you’re getting more for the latter. So long as you’re taking on the debt to finance purchases that are going to drive productivity and performance in your business, then there’s generally nothing wrong with taking on debt. Taking on debt can also help you overcome any unexpected short-term cash flow issues that you might have to face. If you’ve ever worked in any stock-based business, you will understand the short-term cash flow issues businesses typically face. Partnering with a finance provider can ease the burden of any stock sales or grant you the best deal of your fastest-selling product.

What is good loan?

In most cases, good credit allows companies to access capital that they might not otherwise have access to so that they can increase the amount of money they earn. Good debt is one that can aid your business in moving to the next level - it can be for buying the most expensive equipment such as delivery vehicles, or even to help with marketing and advertising. If you’ve earned an income from the loan (bigger than the cost) that’s usually going to be considered a good loan. As an example, a skin abrasion and scar management clinic proprietor took out a tiny business loan to buy a brand new salon, refurbish the salon and employ a business coach which was considered a good debt. The premises were quite old and deteriorated. I wanted to brighten them up and make a beautiful space where people were eager to go, where it’s nice, cozy and welcoming. Good debt can also be employed to improve a company’s working capital as well as smooth the cash flow challenges during challenging or quiet times like the summer holidays for businesses that specialize in service. The majority of people believe that Christmas is one of the most wonderful occasions during the entire year. However, when everyone else is enjoying themselves this can be the most difficult business time in the whole year. Paying customers are late, sales may decrease and suppliers will want to be paid.

What is a bad credit?

Bad debt however is typically something that costs you more than what you earn from it. So it’s either not going to drive sales, it’s not going improve your bottom line, or not going to boost the overall value or productivity of your company. For example, under certain circumstances, purchasing a new company car can be a bad debt. If you’re borrowing money to purchase that vehicle is going to allow you to do more work for greater numbers of people in more locations, or it’s a vehicle that you require in order to deliver your product, then that’s a value-adding vehicle. If it’s simply a car you’re buying in the interest of having an impressive new car for the company and isn’t providing any direct benefit for the company, that’s a bad credit.

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

When it comes to determining what business financing you’re contemplating is a good debt or a bad debt, it’s important to crunch the numbers. It is recommended to ask yourself the following questions:

• What is the maximum amount I can make using the money I’ve borrowed? What’s the chance?
• What is the amount of interest and other costs will I be required to pay to cover the debt?
• Are I financially secure in the future?
• How do I have to wait to get to that situation?
• Can the money be used elsewhere to get a higher return within a shorter amount of time?
• Are I spending more than my budget?

Consider the opportunities that investing in additional funds can provide, and whether they will provide a net benefit for your business. When you invest, it is important to understand the return you’re receiving on your investment. Perhaps upgrading your site or shop will draw more customers in or a brand new piece of equipment could provide you a whole new revenue stream. The main thing is you budget the return, the repayment plan and your ability. If you’re still uncertain the likelihood of finance being a great debt or bad for your company, talk to your accountant.