Bad debt vs good debt: Learn what they are

For many the idea of debt is daunting to contemplate However, the truth is that accepting the right type of debt can help your company to grow and flourish. So how do you work out what debt makes good business sense? It’s about looking at how long-term value it is likely to bring to your company. What’s important is to evaluate the benefits that you hope to gain from borrowing (such as the ability to increase sales) against the cost of the debt (such as interest and fees) and ensuring the former is greater than the latter. As long as you’re taking on debt to finance purchases that will improve the efficiency and effectiveness of your company, there’s no reason to avoid the use of debt. In addition, borrowing money can assist in the resolution of any short-term cash flow issues that you might confront. If you’ve ever had the opportunity to run a stock business and have experienced the issues of cash flow that businesses typically face. Partnering with a finance provider can ease the burden of any stock sales or grant access to the largest offer of your most popular product.

What is good credit?

In most cases, good credit allows a business to leverage capital they wouldn’t otherwise be able to access in order to increase the returns. Good debt is debt that can assist your company in moving to the next stage - it can be for buying the most expensive equipment, getting delivery vehicles or even to help with marketing and advertising. As long as you’ve made the potential to earn a profit from that credit (bigger than the amount you incurred) then it’s likely to be a good debt. For example a skin wound and scar management clinic’s owner took out a small business loan to purchase a brand new salon, refurbish the premises and hire a business coach which was considered good credit. The salon was quite outdated and in need of a makeover. I wanted to brighten them up and make it a beautiful space where people wanted to come to, where it’s comfortable, homey and warm. The good debt is also utilized to boost a company’s working capital, and to smooth out cash flow issues over tough or quiet periods for instance, like the summer holidays for companies that provide services. For most people, Christmas is among the most pleasant times of the year. As everyone other people are enjoying their holiday the holiday season can turn into the worst time for business in the whole year. Paying customers are on time, sales might decline and suppliers would like to be paid.

What is bad credit?

Bad debt However, bad debt, is generally something that will cost you more than the benefits you earn from it. Therefore, it’s likely not increase sales, it’s not likely to boost your bottom line or not going to improve your overall productivity or value of your business. In certain circumstances, a new car for your company could be a bad credit. If you borrow money to purchase this vehicle will result in you being able to work harder for more people in more places or it’s a car that you must have in order to deliver products, it’s an investment in value. But if it’s just the kind of vehicle you buy to have an impressive new car for the company and isn’t adding any direct value to the business, that’s a bad debt.

How can you tell if you are in good debt vs bad debt

When it comes to determining whether the business finance you’re considering will be an acceptable debt or a bad debt, it’s vital to calculate the numbers. It is recommended to ask yourself these questions:

• What is the maximum amount I can make with the money I’ve borrowed? What’s the opportunity?
• How much interest and cost will I have to pay for the loan?
• Are I in a positive financial position in the long run?
• How do I have to wait to achieve this place?
• Can the money be used elsewhere to get a higher return within a shorter time?
• Are I spending above my means?

You should also consider the possibilities that additional funding could provide, and whether they will provide an overall benefit to your business. When investing, you need to be aware of the ROI you’re receiving on your investment. Perhaps upgrading your web site or store can draw more customers in or a new piece of equipment could give you a new revenue stream. It is important to plan the return, the repayment schedule , and your capability. If you’re not sure the likelihood of finance being a positive or bad debt for your company, talk with your accountant.