Bad debt vs good debt: Learn which is which

For many it can be a daunting task to accept However, the truth is that having the right amount of debt will allow your business to grow and flourish. How do you figure out what debt makes good business sense? It’s all about assessing the long-term value the debt will likely bring to your business. The most important thing to consider is the benefits that you hope to reap from the debt (such as being able to sell more) as well as the expenses associated with borrowing (such as fees and interest) as well as ensuring the former is larger than the latter. If you’re using the debt to finance purchases which will boost the efficiency and effectiveness of your business, then there’s generally nothing wrong with taking on debt. It can assist in the resolution of any short-term cash flow problems you might be facing. If you have ever run the stock market then you’ll know the cash flow problems that short-term companies typically have. A partnership with a finance company can provide relief to stop any stock-outs, or give you access to the bulk discount of your product that is the fastest-selling.

What is good credit?

In the end, good debt permits an organization to borrow capital that they would not otherwise be able to access for the purpose of increasing the amount of money they earn. Good debt is debt that’s going to aid your business in moving to the next level - it can be for buying a big piece of kit and delivery vehicles or even to help with advertising and marketing. As long as you’ve got some sort of return on the debt (bigger than the cost) that’s usually going to be a great debt. For instance, a skin wound and scar management clinic owner took out a small business loan to purchase a brand new salon, refurbish the premises and hire an expert business coach. This was considered to be a great debt. The location was rather old and dilapidated. I had to bring the place and create a a beautiful space where people were eager to go and feel relaxing and cozy. It can also be employed to improve a company’s working capital, and to smooth out cash flow problems during difficult or quiet periods, such as the summer holidays for businesses that are service-based. For most people, Christmas is one of the most wonderful times for the whole year. Unfortunately, as everyone else is enjoying their time this can be the most difficult business time of the year. People pay you late, sales may decline and suppliers would like to be paid.

What is bad debt?

Bad debt On the other hand, is generally something that costs you more than what you can get from it. It’s not likely increase sales, it’s not going to improve your bottom line, or it’s not going to boost the overall performance or value of your company. In certain conditions, a company vehicle that is new could be a bad credit. If you’re borrowing money to purchase that vehicle is going to enable you to perform more work for many more people at more locations and it’s a vehicle that you must have for the delivery of an item, that’s a value-adding vehicle. However, if it’s the kind of vehicle you buy to have an impressive new car for the company, and it’s not really providing any value directly to your business, then it’s an unworthy debt.

How to determine good debt vs bad debt

In order to determine whether the business financing you’re thinking about is a good debt or a bad debt, it’s vital that you crunch the numbers. The expert suggests asking yourself the following questions:

• How much can I make with the money I borrow? What’s my chance?
• What is the amount of interest and other costs must I pay to cover the credit?
• Will I be in a better financial position in the long run?
• How long will it take me to reach that positive situation?
• The money can be used elsewhere to get a higher return in a shorter period of time?
• Are I spending more than my budget?

Also, you should consider the possibilities that additional funding can bring, and if the opportunities you’re pursuing will yield the net benefits for your business. When you invest, it is important to know the value you’re getting from your investment. Perhaps upgrading your site or shop will attract more customers or a new piece of equipment can give you a new service line and revenue stream. The most important thing is to set a budget for the return, the repayment timetable 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 business, talk with your accountant.