Good debt vs bad debt: How to know which is which

For many people they find debt to be daunting to consider however the reality is that taking on the right kind of debt can help your business to grow and prosper. How do you figure out what debt makes good business sense? It’s all about assessing how long-term value it will bring to your company. What is key is comparing the benefits you’re hoping to accrue from the debt (such as being able to make more sales) versus the costs of borrowing (such as interest and fees) as well as ensuring the former is larger than the latter. So long as you’re taking on debt to make purchases that can improve productivity and performance in your company, there’s no reason to avoid the use of debt. The use of debt can assist you in dealing with any cash flow issues you could have to face. If you have ever run an investment company and have experienced the issues of cash flow that businesses often face. Partnering with a finance provider will help you stop any stock-outs, or give you the best deal of your fastest-selling product.

What is good credit?

In most cases, good credit allows a business to access capital that they might not otherwise be able to access in order to boost their returns. Good debt is one that can help your business step up to the next stage - it could be used to purchase an enormous piece of equipment and delivery vehicles or even debt to help in marketing and advertising. As long as you’ve made a return on that loan (bigger than the expenses) that’s usually going to be a decent debt. As an example, a skin abrasion and scar management clinic’s owner took out a modest business loan to purchase a new salon, renovate the premises , and also hire a business coach which was considered a good debt. The salon was quite old and deteriorated. I had to bring the space and create the perfect place where people would want to visit, where it’s nice, homey and warm. It can also be utilized to boost a company’s working capital as well as smooth cash flow problems during difficult or quiet periods for instance, like the summer vacations for companies that provide services. For the majority of people, Christmas is one of the best time of the year. Unfortunately, as everyone else is enjoying their time the holiday season can turn into the worst time for business during the entire year. People pay you late, sales can fall, and suppliers are eager to be paid.

What is a bad credit?

Bad debt however, is generally something that costs you more than what you can get from it. It’s not likely boost sales, it’s not going to improve your bottom line or unlikely to enhance the overall performance or value of your business. For example, under certain circumstances, a new company car can be considered a bad loan. If you borrow money to purchase that vehicle is going to lead to you being able to do more work for more people in more places or is a vehicle that you need to have for the delivery of the product you’ve developed, it’s an investment in value. However, if it’s just a vehicle that you’re buying just to get a brand new corporate car and isn’t providing any direct benefit for the company, that’s a bad debt.

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

In order to determine the possibility that the business finance you’re contemplating is an acceptable debt or a bad debt, it’s vital to crunch the numbers. He recommends you ask yourself these questions:

• What is the maximum amount I can make from the funds I’ve borrowed? What’s the opportunity?
• How much interest and costs must I pay on the loan?
• Do I stand in a better financial position over the long term?
• How much time will it take me to achieve this place?
• Can the money be used elsewhere to get a higher return within a shorter time?
• Am I spending beyond my budget?

It is also important to consider the opportunities that investing in additional funds can provide, and whether these opportunities will bring a net benefit for your company. If you are investing, you must to know the value you’re getting on your money. Perhaps a revamp of your web site or store can draw more customers in or a new piece or piece of equipment could offer a completely new income stream. The key is to plan the return, the repayment timetable and the capacity of your business. If you’re still unsure of whether finance will end up being a great debt or bad debt for your company, talk to your accountant.