Bad debt vs good debt: How to identify what they are

For many people it can be a daunting task to contemplate However, the truth is that having the right amount of debt can allow your company to grow and flourish. How can you figure out what kind of debt is best for business sense? It’s about looking at the value that the debt will bring to your company. It is crucial to compare the benefits you expect to receive from the debt (such as the ability to sell more) as well as the expenses associated with this debt (such as interest and charges) as well as ensuring you’re getting more for the latter. As long as you’re using the loan for purchases which will boost efficiency and productivity in your business, then there’s usually nothing wrong with debt. In addition, borrowing money can assist you in dealing with any unexpected short-term cash flow problems you might be facing. If you’ve ever had the opportunity to run an investment company then you’ll know the cash flow problems that short-term businesses typically face. A partnership with a finance company will help you stop any stock sales or grant you access to the biggest deal of your fastest-selling product.

What is good credit?

In simple terms, good debt allows companies to tap into capital they wouldn’t otherwise have access to in order to boost the returns. Good debt is debt that can assist your company in moving to the next stage - it could be to buy an expensive piece of equipment such as delivery vehicles, or even to help in marketing and advertising. As long as you’ve got an income from the loan (bigger than the expenses) then it’s likely to be a decent debt. For example a skin wound and scar management clinic owner obtained a small business loan to buy the salon a new one, remodel the premises and hire an executive coach, which was considered a good debt. The premises were quite old and dismal. I had to bring the space and create the perfect place where people would want to visit in, where it’s warm, cosy and inviting. It can also be used to boost a business’s working capital, and to smooth out the cash flow challenges during challenging or quiet times, such as the summer months for businesses that specialize in service. For the majority of people, Christmas is among the most enjoyable time for the whole year. However, when everyone else is enjoying themselves the holiday season can turn into the most challenging business period that year. When people pay you on time, sales might decline and suppliers would like to be paid.

What is bad credit?

Bad debt, on the other hand it is usually something that costs more than you earn from it. Therefore, it’s likely not to drive sales, it’s not going to improve your bottom line, or it’s not going to boost your overall productivity or value of your company. For instance, in certain conditions, a company vehicle that is new could be a bad debt. If you’re borrowing money to purchase that vehicle is going to result in you being able to do more work for more people in more places, or it’s a vehicle that you require to be able to provide your product, then that’s an asset that adds value to your business. If it’s simply an automobile you’re purchasing for the sake of having an attractive new car for your company and isn’t providing any direct benefit to your business, then it’s a bad loan.

How to determine good debt vs bad debt

When it comes to determining whether the business finance you’re looking at is a good or bad debt, it’s vital that you crunch the numbers. The expert suggests asking yourself these questions:

• How much money can I earn from the money I’ve borrowed? What’s the chance?
• How much interest and costs will I be required to pay on the loan?
• Are I financially secure in the long run?
• How many years will it take to achieve that positive situation?
• The money can be used elsewhere to get a higher return within a shorter time?
• Are I spending more than my means?

Consider the opportunities that extra funding could provide, and whether they will provide the net benefits for your company. If you are investing, you must be aware of the returns you’re getting on your money. Perhaps a revamp of your website or your shop can draw more customers in, or a new piece of equipment may bring you a brand new revenue stream. It is important to plan the return, the repayment schedule and your capability. If you’re still unsure of the likelihood of finance as a good or a bad debt for your business, speak with your accountant.