Good debt vs bad debt: How to identify what they are

For many it can be a daunting task to take on However, the truth is that accepting the right type of debt could allow your company to grow and thrive. 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 company. What is key is comparing the benefits you anticipate to reap from the debt (such as the ability to sell more) versus the costs of borrowing (such as interest and charges) as well as ensuring you’re getting more for the latter. As long as you’re using the debt to finance purchases that will improve the efficiency and effectiveness of your company, there’s no reason to avoid borrowing. The use of debt can aid in overcoming any sudden cash flow issues that you might encounter. If you have ever run an investment company and have experienced the cash flow problems that short-term companies typically have. By partnering with a financing provider, you can ease the burden of any stock sales or grant you access to the bulk discount of your product that is the fastest-selling.

What is good loan?

In essence, good debt allows businesses to leverage capital they wouldn’t otherwise be able to access in order to boost their profits. Good debt is one that’s going to enable your business to move to the next step - it could be used to purchase an enormous piece of equipment, getting delivery vehicles or even debt to help with advertising and marketing. As long as you’ve made the potential to earn a profit from that debt (bigger than the costs) then it’s likely to be a decent debt. For instance, a skin wound and scar management clinic owner took out a small business loan to purchase the salon a new one, remodel the facility and employ an executive coach, which was considered good credit. The salon was quite old and dilapidated. I had to bring them up and make it the perfect place where visitors wanted to be in, where it’s warm, cozy and welcoming. Good debt can also be used to boost a business’s working capital and smooth out cash flow problems during difficult or slow periods like the summer holidays for companies that provide services. For the majority of people, Christmas is one of the best occasions during the entire year. As everyone else is having a blast the holiday season can turn into the most challenging business period during the entire year. Customers pay on time, sales might decrease and suppliers will want to be paid.

What is a bad credit?

Bad debt, on the other hand, is generally something that will cost you more than the benefits you gain from it. Therefore, it’s likely not boost sales, it’s not going to improve your bottom line or it’s not going to boost the overall value or productivity of your company. For example, under certain conditions, a brand 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 do more work for greater numbers of people in more locations and it’s a vehicle that you must have in order to deliver an item, that’s an asset to the business. However, if it’s just a vehicle that you’re buying to have a flash new company car and isn’t providing any value directly for the company, that’s an unworthy loan.

How to determine the difference between bad and good debt

When it comes to determining the possibility that the business finance you’re considering will be a good debt or a bad debt, it’s important that you crunch the numbers. It is recommended to ask yourself these questions:

• How much money can I make from the funds I’ve borrowed? What’s the chance?
• What amount of interest and charges will I be required to pay to cover the credit?
• Do I stand financially secure over the long term?
• How long will it take me to achieve this situation?
• Can the money be used in other ways to earn a higher return within a shorter amount of time?
• Are I spending above my budget?

Consider the opportunities that investing in additional funds could provide, and whether the opportunities you’re pursuing will yield the net benefits for your company. When investing, you have to understand the return you’re receiving on your investment. Maybe a new site or shop will bring in more customers, or a new piece or piece of equipment could give you a new service line and 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 whether the finance you take on will end up as a good or a bad debt for your company, talk with your accountant.