Bad debt vs good debt: Learn what they are

For many people they find debt to be daunting to take on However, the truth is that accepting the right type of debt will allow your business to grow and grow. How do you figure out what debt makes good business sense? It’s all about assessing the long-term value the debt is likely to bring to your business. It is crucial to compare the benefits you anticipate to accrue from the debt (such as the ability to generate more sales) as well as the expenses associated with the debt (such as fees and interest) as well as ensuring you’re getting more for the latter. As long as you’re using the loan to finance purchases which will boost the efficiency and effectiveness of your company, there’s usually nothing wrong with debt. The use of debt can help you overcome any short-term cash flow problems you might have to face. If you’ve ever had the opportunity to run any stock-based business, 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 sale on your top-selling product.

What is good debt?

In simple terms, good debt allows a business to access capital that they might not otherwise be able to access so that they can increase the amount of money they earn. Good debt is one that will assist your company in moving to the next level . it can be for buying an expensive piece of equipment, getting delivery vehicles or even to help in marketing and advertising. As long as you’ve got an income from the debt (bigger than the cost) the chances are it’s going to be a great debt. For instance, a skin wound and scar management clinic’s owner took out a modest business loan to acquire a new salon, renovate the premises , and also hire an expert business coach. This was deemed to be a good debt. The salon was quite outdated and in need of a makeover. I had to bring the place and create a a beautiful space where people wanted to come to, where it’s comfortable, homey and warm. It can also be used to increase a business’s working capital and ease the cash flow challenges during challenging or quiet times such as the summer holiday season for businesses that are service-based. The majority of people believe that Christmas is among the most wonderful occasions of the year. Unfortunately, as everyone else is enjoying their time it can also turn into the worst business period that year. Paying customers are on time, sales might decline and suppliers would like to be paid.

What is bad credit?

Bad debt, on the other hand, is generally something that costs you more than what you get out of it. This means that it’s unlikely increase sales, it’s not going to improve your bottom line, or it’s not likely to increase the overall efficiency or value of your company. For instance, in certain circumstances, a new company car can be a bad debt. If you’re borrowing money to purchase this vehicle will allow you to perform more work for greater numbers of people in more locations or is a vehicle that you require in order to deliver your product, then it’s an investment in value. However, if it’s just the kind of vehicle you buy in the interest of having a brand new corporate car, and it’s not really adding any direct value to your business, then it’s an unworthy loan.

How can you tell if you are in the difference between bad and good debt

When it comes to determining what business financing you’re considering will be an acceptable debt or a bad debt, it’s vital to crunch the numbers. He recommends you ask yourself the following questions:

• What is the maximum amount I can make using the money I’ve borrowed? What’s the best way to make money?
• What amount of interest and charges will I have to cover on the debt?
• Do I stand in a good financial position in the long run?
• How much time will it take me to reach that positive situation?
• The money can be used elsewhere to get a higher return within a shorter amount of time?
• Are I spending more than my means?

It is also important to consider the opportunities that investing in additional funds will provide, and whether these opportunities will bring positive outcomes for your business. When investing, you have to be aware of the ROI you’re getting on your money. Maybe upgrading your website or your shop can bring in more customers or a brand new piece or piece of equipment could offer a completely new revenue stream. The most important thing is to set a budget for the return, the repayment timetable and your ability. If you’re unsure what the outcome of your finance is as a good or a bad debt for your company, talk to your accountant.