Good debt vs bad debt: Learn which is which

For many the idea of debt is daunting to contemplate However, the truth is that having the right amount of debt could allow your business to expand and grow. So , how do you figure out what kind of debt makes business sense? It’s about looking at how long-term value it is likely to add to your business. The most important thing to consider is the benefits you anticipate to reap from the debt (such as the ability to increase sales) against the cost of taking on the loan (such as fees and interest) and ensuring the former is greater than the latter. As long as you’re taking on debt for purchases that are going to drive productivity and performance in your business, then there’s nothing wrong with taking on debt. Taking on debt can also assist you in dealing with any short-term cash flow problems you might be facing. If you’ve run any stock-based business and have experienced the cash flow problems that short-term companies typically have. Partnering with a finance provider will help you stop any stock-outs, or give access to the largest sale on your top-selling product.

What is good credit?

In most cases, good credit allows an organization to access capital that they might not otherwise be able to access in order to increase their profits. Good debt is debt which will help your business step up to the next step - it could be for the purchase of a big piece of kit such as delivery vehicles, or even loans to assist with marketing and advertising. If you’ve earned a return on that debt (bigger than the costs) the chances are it’s going to be a decent debt. For instance, a skin wound and scar management clinic’s owner obtained a small business loan to acquire an all-new salon, upgrade the premises , and also hire an experienced business coach. It was considered a good credit. The building was old and deteriorated. I wanted to brighten them up and make it the perfect place where people were eager to go and feel cozy and welcoming. It can also be used to increase a business’s working capital and smooth out the cash flow challenges during challenging or quiet periods for instance, like the summer months for businesses that are service-based. For many, Christmas is among the most pleasant seasons of the year. Unfortunately, as everyone else is having a blast, it often turns into the worst time for business that year. When people pay you late, sales can fall, and suppliers are eager to be paid.

What is a bad credit?

Bad debt On the other hand typically is more expensive than what you earn from it. Therefore, it’s likely not boost sales, it’s not going improve your bottom line or not going to boost the overall performance or value of your company. For instance, in certain circumstances, a new car for your company could be a bad debt. If borrowing money to buy this vehicle will result in you being able to do more work for greater numbers of people in more locations or it’s a car that you require for the delivery of an item, it’s an asset to the business. However, if it’s just the kind of vehicle you buy in the interest of having a flash new company car and isn’t contributing any tangible value to your company, it’s a bad debt.

How to distinguish good debt from bad debt?

In order to determine whether the business finance you’re thinking about is an acceptable debt or a bad debt, it’s important that you analyze the numbers. It is recommended to ask yourself these questions:

• What amount of money can I earn from the money I borrow? What’s the opportunity?
• How much interest and costs must I pay to settle the amount of debt?
• Are I in a positive financial position in the long run?
• How much time will it take me to get to that situation?
• The money can be used in other ways to earn a higher return in a shorter period of time?
• Do I spend more than my budget?

Consider the opportunities that extra funding will provide, and whether these opportunities will bring positive outcomes for your business. If you are investing, you must to be aware of the ROI you’re getting from your investment. Perhaps upgrading your site or shop will draw more customers in or a new piece or piece of equipment could give you a new revenue stream. The main thing is you plan the return, the repayment schedule and your capability. If you’re not sure whether finance will end up as a good or bad for your business, talk with your accountant.