Bad debt vs good debt: How to know which is which

For many, debt can be intimidating to take on But the truth is that taking on the right kind of debt could allow your company to grow and thrive. So , how do you figure out what kind of debt is best for business sense? It’s all about looking at the long-term value of the debt will likely bring to your company. What is key is comparing the benefits you expect to receive from the debt (such as being able to increase sales) as well as the expenses associated with 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 can improve the efficiency and effectiveness of your business, then there’s nothing wrong with borrowing. Taking on debt can also assist you in dealing with any cash flow issues you may have to face. If you’ve ever worked in the stock market, you will understand the challenges that short-term cash flow businesses typically face. A partnership with a finance company can ease the burden of the stock outs and give access to the largest sale on your top-selling product.

What is good deben?

In essence, good debt allows companies to borrow capital that they would not otherwise have access to in order to boost the returns. Good debt is debt that’s going to enable your business to move to the next step - it could be to buy the most expensive equipment, getting delivery vehicles or even debt to help with advertising and marketing. If you’ve earned some sort of return on the debt (bigger than the costs) that’s usually going to be a decent debt. For example a skin wound and scar management clinic owner took out a modest business loan to purchase the salon a new one, remodel the facility and employ an experienced business coach. It was considered a good credit. The premises were quite old and dilapidated. I wanted to clean them up and make it an inviting space that people were eager to go, where it’s nice, cosy and inviting. It can also be used to increase a business’s working capital as well as smooth cash flow issues over tough or slow periods such as the summer months for businesses that are service-based. For many, Christmas is among the best 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. Paying customers are on time, sales might decrease and suppliers will want to be paid.

What is bad debt?

Bad debt On the other hand, is generally something that costs more than you gain from it. So it’s either not going boost sales, it’s not going to improve your bottom line, or not going to improve the overall efficiency or value of your company. For instance, in certain circumstances, a new company car can be a bad debt. If you’re borrowing money to purchase that vehicle is going to lead to you being able to work harder for greater numbers of people in more locations or it’s a car that you require for the delivery of the product you’ve developed, that’s an asset to the business. If it’s simply the kind of vehicle you buy in the interest of having an impressive new car for the company and isn’t contributing any tangible value to your business, then it’s an unworthy credit.

How to determine the difference between bad and good debt

When you’re trying to figure out the possibility that the business finance you’re looking at is a good or bad debt, it’s crucial that you analyze the numbers. He recommends you ask yourself these questions:

• How much money can I make with the money I borrow? What’s my chance?
• How much interest and cost will I be required to pay for the debt?
• Will I be in a better financial position in the long run?
• How do I have to wait to reach that positive standing?
• Can the funds be put to use to purchase other products for better returns within a shorter amount of time?
• Am I spending beyond my means?

You should also consider the opportunities that investing in additional funds could provide, and whether they will provide a net benefit for your business. If you are investing, you must be aware of the returns you’re earning on your investment. Perhaps a revamp of your web site or store can attract more customers or a new piece of equipment may bring you a brand new revenue stream. The main thing is you set a budget for the return, the repayment timetable and the capacity of your business. If you’re still unsure of what the outcome of your finance is being a good debt or bad debt for your business, speak to your accountant.