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HomeBusiness StrategiesSmall BusinessYour small business: Understanding the difference between ‘good’ and ‘bad’ debt

Your small business: Understanding the difference between ‘good’ and ‘bad’ debt

Starting, establishing, and running a business is full of financial ups and downs. There will be times when you are struggling to make ends meet and other times when profitability skyrockets. There will also be times when you will need to make decisions regarding the potential for the growth of your business, and whether to take a financial risk.

Understanding the difference between ‘good’ and ‘bad’ debt can help you make these difficult decisions and avoid falling into the new business ‘debt trap’. Here are the facts that you need to know.

What is ‘good’ debt?

You might be surprised to discover that there are several instances when it is actually a good idea to seek financial support in the form of credit or a loan. This is true just as long as you apply for funding from a reputable lender, such as

A great example of when debt is sure to lead to a positive outcome is when you take out a loan to further your education. Perhaps you want to enhance your business-savvy and study a part-time business management course? Or maybeyou want to invest in helping your staff members to develop their skills in order to better serve customers.

Another example of ‘good’ debt is taking out a loan to facilitate the growth of your business when presented with an unmissable opportunity. Always remember to take the time to establish the various risks associated with every growth opportunity that comes your way and only act if there is a very good chance that your enterprise will benefit in the long run. If the risks or the costs associated with the opportunity are too high, it is wiser to wait until you are in a financial position to better mitigate those risks.

Finally, ‘good’ debt also comes in the form of seeking financial assistance to help remedy a crisis or a loss. For instance, if a vital piece of machinery breaks down in your factory and you are unable to continue fulfilling consumer orders without it, it makes sense to take out a loan to have it replaced or repaired.

If ever you find yourself and your business experiencing problems with debt and you have several creditors whom you are trying to pay off, applying for a debt consolidation loan can offer you significant relief. Most financial experts will agree that debt consolidation loans are another form of ‘good’ debt.

What is ‘bad’ debt?

Just as there is ‘good’ debt when it comes to your business, there is ‘bad’ debt, too. Examples of ‘bad’ debt include:

  • purchasing items or assets that are known to rapidly depreciate in value
  • taking on a growth opportunity with significant risk
  • investing in anything risky
  • fulfilling the latest tends (such as decorating your office)

Remember, it is always going to be ‘bad’ debt if you take out a loan for any reason when you are fully aware that you will not manage to pay your monthly repayments in full or on time.

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