Good debt vs bad debt: Learn which is which

For many people they find debt to be daunting to take on however the reality is that taking on the right kind of debt will allow your company to grow and flourish. How do you figure out what debt makes good business sense? It’s all about considering the value that the debt is likely to bring to your business. The most important thing to consider is the benefits you anticipate to accrue from the debt (such as being able to make more sales) versus the costs of taking on the loan (such as interest and fees), and making sure the former is greater than the latter. So long as you’re using the debt for purchases that will improve productivity and performance in your business, then there’s usually nothing wrong with taking on debt. In addition, borrowing money can assist you in dealing with any cash flow issues you may encounter. If you have ever run any stock-based business and have experienced the challenges that short-term cash flow businesses often face. By partnering with a financing provider, you can provide relief to stop any stock outs or get you access to the biggest sale on your top-selling product.

What is good deben?

In the end, good debt permits companies to tap into capital they wouldn’t otherwise be able to access in order to increase their returns. Good debt is one that can enable your business to move to the next level . it could be for the purchase of the most expensive equipment, getting delivery vehicles or even to help in marketing and advertising. As long as you’ve made a return on that credit (bigger than the cost) then it’s generally going to be a good debt. For example a skin wound and scar management clinic’s owner obtained a small business loan to purchase a new salon, renovate the premises , and also hire an executive coach, which was considered good credit. The building was old and dilapidated. I wanted to clean the space and create an inviting space that visitors wanted to be and feel homey and warm. It can also be used to boost a business’s working capital and ease cash flow issues over tough or slow periods like the summer holidays for businesses that specialize in service. For the majority of people, Christmas is one of the most pleasant seasons of the year. As everyone else is having a blast this can be the worst business period in the whole year. People pay you late, sales can fall, and suppliers are eager to be paid.

What is a bad debt?

Bad debt, on the other hand, is generally something that costs you more than what you get out of it. It’s not likely increase sales, it’s not going improve your bottom line, or not going to improve the overall efficiency or value of your company. In certain circumstances, purchasing a new company car can be considered a bad debt. If borrowing money to buy that vehicle is going to lead to you being able to provide more services to many more people at more locations or it’s a car that you need to have in order to deliver products, that’s an asset that adds value to your business. However, if it’s just an automobile you’re purchasing in the interest of having an impressive new car for the company and isn’t providing any direct benefit to your company, it’s a bad loan.

How do you determine whether you have good debt vs bad debt

In order to determine what business financing you’re thinking about is a good or 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 with the money I borrow? What’s the best way to make money?
• What is the amount of interest and other costs will I have to cover to settle the debt?
• Are I financially secure in the long run?
• How do I have to wait to reach that positive standing?
• Can the funds be put to use to purchase other products for better returns within a shorter period?
• Are I spending above my means?

Consider the opportunities that investing in additional funds can bring, and if the opportunities you’re pursuing will yield positive outcomes for your company. When investing, you need to be aware of the ROI you’re getting from your investment. Maybe upgrading your web site or store can draw more customers in or a new piece of equipment could offer a completely new income stream. The main thing is you prepare the return in advance, as well as the repayment schedule and the capacity of your business. If you’re still uncertain what the outcome of your finance is as a good or bad for your company, talk to your accountant.