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

For many people it can be a daunting task to accept however the reality is that taking on the right kind of debt could allow your business to expand and grow. So , how do you figure out what kind of debt makes business sense? It’s about looking at the long-term value the debt will bring to your business. What is key is comparing the benefits that you hope to receive from the debt (such as the ability to sell more) against the cost of borrowing (such as fees and interest) and ensuring the former is larger than the latter. So long as you’re using the debt to finance purchases that will improve the efficiency and effectiveness of your company, there’s nothing wrong with borrowing. The use of debt can help you overcome any sudden cash flow issues that you might have to face. If you have ever run the stock market, you will understand the short-term cash flow issues businesses typically face. Working with a financial institution can ease the burden of any stock outs or get you access to the biggest discount of your product that is the fastest-selling.

What is good debt?

In simple terms, good debt allows an organization to leverage capital they wouldn’t otherwise be able to access in order to boost the amount of money they earn. Good debt is debt that can help your business step up to the next level . it could be used to purchase a big piece of kit, getting delivery vehicles or even loans to assist in marketing and advertising. As long as you’ve made an income from the credit (bigger than the costs) then it’s generally going to be a good debt. For instance, a skin wound and scar management clinic’s owner took out a small business loan to purchase the salon a new one, remodel the premises and hire an expert business coach. This was considered a good debt. The salon was quite old and dismal. I had to bring them up and make the perfect place where people were eager to go to, where it’s comfortable, cozy and welcoming. The good debt is also used to boost a business’s working capital and smooth out cash flow issues during tough or quiet periods for instance, like the summer months for businesses that are service-based. For many, Christmas is one of the most pleasant occasions of the year. However, when everyone else is enjoying themselves, it often turns into the worst time for business of the year. Customers pay on time, sales might drop and suppliers want to be paid.

What is a bad credit?

Bad debt However, bad debt typically costs you more than what you can get from it. This means that it’s unlikely bring in sales, or it’s unlikely to increase your bottom line or not going to improve the overall performance or value of your company. In certain conditions, a new company car can be a bad debt. If borrowing money to buy the car will allow you to perform more work for the greater number of people across more places or is a vehicle that you need to have to be able to provide your product, then that’s an asset that adds value to your business. However, if it’s a car you’re buying for the sake of having a flash new company car, and it’s not really adding any direct value for the company, that’s a bad debt.

How to determine the difference between good and bad debt

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

• What is the maximum amount I can make using the money I’ve borrowed? What’s the opportunity?
• What amount of interest and charges must I pay for the debt?
• Are I financially secure in the future?
• How many years will it take to reach that positive place?
• Could the money be utilized elsewhere to get a higher return within a shorter amount of time?
• Are I spending above my means?

Also, you should consider the opportunities that extra funding can bring, and if they will provide positive outcomes for your company. When investing, you have to know the value you’re getting on your money. Perhaps upgrading your site or shop will attract more customers, or a new piece of equipment can offer a completely new revenue stream. It is important to plan the return, the repayment timetable and the capacity of your business. If you’re unsure whether the finance you take on will end up being a good debt or a bad debt for your business, speak with your accountant.