Bad debt vs good debt: Learn what they are

For many they find debt to be daunting to accept However, the truth is that having the right amount of debt will allow your company to grow and grow. How do you figure out what debt makes good business sense? It’s all about assessing the long-term value of the debt is likely to bring to your company. The most important thing to consider is the benefits you anticipate to accrue from the debt (such as being able to make more sales) in comparison to the costs associated with this debt (such as fees and interest) and ensuring that the former is more than the latter. As long as you’re taking on the debt for purchases that will improve the efficiency and effectiveness of your business, then there’s generally nothing wrong with the use of debt. Taking on debt can also aid in overcoming any unexpected short-term cash flow issues that you might be facing. If you’ve ever had the opportunity to run an investment company you’ll be aware of the cash flow problems that short-term businesses often face. By partnering with a financing provider, you can provide relief to stop any stock-outs, or give you access to the bulk sale on your top-selling product.

What is good loan?

In the end, good debt permits companies to leverage capital they wouldn’t otherwise be able to access in order to boost their profits. Good debt is debt that’s going to help your business step up to the next stage - it could be to buy the most expensive equipment and delivery vehicles or even to help with advertising and marketing. If you’ve earned a return on that debt (bigger than the expenses) then it’s likely to be a decent debt. As an example, a skin abrasion and scar management clinic’s owner took out a modest business loan to acquire an all-new salon, upgrade the facility and employ an executive coach, which was deemed to be a good debt. The location was rather old and dismal. I needed to freshen the place and create a an inviting space that people were eager to go to, where it’s comfortable, cozy and welcoming. It can also be used to increase a business’s working capital, and to smooth out cash flow issues during tough or slow times for instance, like the summer months for service-based businesses. For the majority of people, Christmas is one of the best occasions during the entire year. While everyone else is having a blast, it often turns into the most challenging business period of the year. Customers pay late, sales can fall, and suppliers are eager to be paid.

What is bad debt?

Bad debt, on the other hand typically costs you more than what you gain from it. This means that it’s unlikely bring in sales, or it’s not likely to boost your bottom line, or not going to boost your overall productivity or value of your business. In certain conditions, a brand new company car could be considered a bad loan. If borrowing money to buy this vehicle will lead to you being able to provide more services to many more people at more locations, or it’s a vehicle that you need to have for the delivery of products, it’s an asset that adds value to your business. But if it’s just the kind of vehicle you buy for the sake of having a brand new corporate car, and it’s not really adding any direct value for the company, that’s an unworthy loan.

How do you determine whether you have good debt from bad debt?

When you’re trying to figure out whether the business finance you’re considering will be an excellent debt or a bad one, it’s essential that you analyze the numbers. He recommends you ask yourself these questions:

• How much can I make from the funds I’ve borrowed? What’s the best way to make money?
• What amount of interest and charges must I pay to cover the loan?
• Will I be in a better financial position over the long term?
• How many years will it take to get to that situation?
• Can the money be used in other ways to earn a higher return within a shorter period?
• Do I spend more than my means?

Also, you should consider the opportunities that extra funding can bring, and if those opportunities will result in a net benefit for your company. When investing, you need be aware of the returns you’re getting on your money. Maybe upgrading your web site or store can draw more customers in or a brand new piece or piece of equipment could bring you a brand new revenue stream. The most important thing is to prepare the return in advance, as well as the repayment schedule and your capacity. If you’re still unsure of whether the finance you take on will end up being a positive or bad for your business, talk to your accountant.