Good debt vs bad debt: Learn what they are

For many it can be a daunting task to take on, but the reality is that accepting the right type of debt will allow your business to grow and flourish. So how do you work out what kind of debt makes business sense? It’s all about looking at the long-term value of the debt is likely to bring to your company. The most important thing to consider is the benefits you expect to gain from borrowing (such as being able to increase sales) as well as the expenses associated with the debt (such as interest and charges), and making sure the former is more than the latter. As long as you’re using the debt to finance purchases that will improve the performance and efficiency of your company, there’s generally nothing wrong with the use of debt. The use of debt can assist in the resolution of any sudden cash flow problems you might be facing. If you’ve run the stock market then you’ll know the challenges that short-term cash flow businesses typically face. A partnership with a finance company can ease the burden of any stock outs or get you access to the bulk offer of your most popular product.

What is good loan?

In simple terms, good debt allows a business to tap into capital they wouldn’t otherwise have access to in order to boost the returns. Good debt is debt that will aid your business in moving to the next step - it could be to buy an enormous piece of equipment for delivery vehicles, or even loans to assist with advertising and marketing. As long as you’ve got the potential to earn a profit from that credit (bigger than the expenses) the chances are it’s going to be a great debt. For example a skin wound and scar management clinic’s owner took out a small business loan to acquire a new salon, renovate the premises and hire an expert business coach. This was considered good credit. The premises were quite outdated and in need of a makeover. I needed to freshen the space and create an attractive space where visitors wanted to be to, where it’s comfortable, homey and warm. It can also be utilized to boost a company’s working capital, and to smooth out cash flow issues during tough or quiet periods like the summer vacations for businesses that are service-based. For the majority of people, Christmas is among the most enjoyable seasons in the calendar. Unfortunately, as everyone else is enjoying themselves this can be the most challenging business period of the year. People pay you late, sales can fall, and suppliers are eager to be paid.

What is bad credit?

Bad debt however is typically something that costs you more than what you get out of it. Therefore, it’s likely not boost sales, it’s not going to improve your bottom line or it’s not going to improve your overall productivity or value of your company. In certain conditions, a brand new company car could be a bad credit. If you’re borrowing money for this vehicle will allow you to work harder for greater numbers of people in more locations and it’s a vehicle which you’re required to have to be able to provide products, it’s a value-adding vehicle. However, if it’s just the kind of vehicle you buy to have an attractive new car for your company and isn’t providing any direct benefit to the business, that’s an unworthy debt.

How to determine good debt vs bad debt

When it comes to determining the possibility that the business finance you’re looking at is a good or bad one, it’s essential to crunch the numbers. He recommends you ask yourself these questions:

• How much money can I earn from 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 cover the debt?
• Are I in a good financial position in the future?
• How do I have to wait to get to that standing?
• Can the funds be put to use in other ways to earn a higher return in a shorter period of time?
• Are I spending more than my budget?

Also, you should consider the opportunities that investing in additional funds can provide, and whether the opportunities you’re pursuing will yield an overall benefit to your company. If you are investing, you must to understand the return you’re earning on your investment. Maybe a new website or your shop can attract more customers or a brand new piece of equipment could give you a new income stream. The most important thing is to set a budget for the return, the repayment plan and your capacity. If you’re not sure what the outcome of your finance is being a positive or bad debt for your business, talk with your accountant.