Bad debt vs good debt: Learn which is which

For many they find debt to be daunting to contemplate However, the truth is that accepting the right type of debt can help your business to grow and grow. So how do you work out which debt is good business sense? It’s all about looking at the long-term value the debt is likely to add to your company. It is crucial to compare the benefits you expect to gain from borrowing (such as being able to sell more) against the cost of this debt (such as fees and interest) and ensuring that the former is larger than the latter. If you’re using the loan to make purchases that are going to drive efficiency and productivity in your business, then there’s nothing wrong with borrowing. The use of debt can assist you in dealing with any cash flow issues you could confront. If you’ve ever had the opportunity to run an investment company you’ll be aware of the short-term cash flow issues businesses often face. Partnering with a finance provider can ease the burden of any stock sales or grant access to the largest sale on your top-selling product.

What is good loan?

In essence, good debt allows companies to leverage capital they wouldn’t otherwise be able to access in order to increase the amount of money they earn. Good debt is one which will help your business step up to the next level - it could be to buy a big piece of kit for delivery vehicles, or even loans to assist with marketing and advertising. As long as you’ve made the potential to earn a profit from that credit (bigger than the expenses) that’s usually going to be considered a good loan. For instance, a skin wound and scar management clinic owner took out a small business loan to acquire a brand new salon, refurbish the premises , and also hire an experienced business coach. It was deemed to be a good credit. The location was rather old and dismal. I wanted to clean them up and make an attractive space where people wanted to come in, where it’s warm, 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 holiday season for companies that provide services. For the majority of people, Christmas is one of the most enjoyable occasions of the year. Unfortunately, as everyone other people are enjoying their holiday it can also turn into the most difficult business time in the whole year. Paying customers are on time, sales might drop and suppliers want to be paid.

What is bad debt?

Bad debt On the other hand it is usually something that costs more than you earn from it. This means that it’s unlikely to drive sales, it’s not going improve your bottom line or not going to boost the overall value or productivity of your company. In certain conditions, a brand new car for your company could be a bad credit. If you’re borrowing money to purchase this vehicle will enable you to work harder for greater numbers of people in more locations and it’s a vehicle that you must have in order to offer your product, then that’s an asset that adds value to your business. If it’s simply a car you’re buying just to get a brand new corporate car and isn’t contributing any tangible value to your company, it’s a bad debt.

How can you tell if you are in the difference between good and bad debt

When you’re trying to figure out what business financing you’re looking at is a good or bad one, it’s essential that you analyze the numbers. He recommends you ask yourself the following questions:

• What is the maximum amount I can earn from the money I’ve borrowed? What’s my chance?
• What amount of interest and charges must I pay on the loan?
• Will I be in a better financial position over the long term?
• How long will it take me to achieve that positive position?
• The money can be used in other ways to earn a higher return within a shorter period?
• Are I spending above my means?

Consider the opportunities that investing in additional funds will provide, and whether these opportunities will bring an overall benefit to your business. If you are investing, you must to be aware of the ROI you’re receiving on your investment. Maybe a new site or shop will draw more customers in or a new piece of equipment can offer a completely new revenue stream. The main thing is you set a budget for the return, the repayment timetable and your ability. If you’re not sure whether the finance you take on will end up being a great debt or bad for your business, talk with your accountant.