How to identify the difference between good debt and bad debt in your small business?

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Debt has never been considered as a positive aspect of finance. But when you think about the small business sector, you will be respected as an intelligent person who knows how to use debt smartly. Debt is a necessary part of your small business. You may need the loan to help your business to grow. But you have to maintain a limit regarding how much loan you should take out because the excessive loan can be a barrier to your business growth.

Why do you need a loan to run your small business?

If you need some equipment for your small business that can escalate your production as well as generate revenue for your business then the ideal way is to opt for a loan.

Even experts who are dealing with small business affairs support the fact that you need the loan obviously while you are in the venture of small business. A great advantage of small business loans is you can get it at a favorable interest rate.

What are the 2 direct benefits of taking out the business loan?

Usually, small business owners opt for the loan to construct their basic business structure because using the business loan may help you with tax savings and you can keep the business profit to you.

1. You can keep the business profit within your business surroundings 

Many small business owners think that taking out small business loans means you will fall into the interest-payment obligation.

It is true but taking out the business loan may help you to retain more profit than if you opt for equity. If you use the equity option it means you have to share your profit with the equity holders.

There is nothing such as a profit-sharing option if you take out a business loan.

2. With the business loan, you can lower your taxes 

The interest deduction from the business debt means you will be able to reduce your tax amount. According to the tax rule, your interest payment deductions can lower your taxes.

The lower your taxable income will be, the less you have to pay your taxes.

These are the 2 direct benefits of taking out a business loan. 

So, what amount can be considered a good debt for your small business?

You cannot say a loan upto a defined amount will be good for your small business because it entirely depends on the situation of your small business.

You should consider the healthy loan amount as an amount that is going on par with your business strategies instead of calculating any particular amount as the ideal good debt amount for your small business. 

Then what are the signs that you are slowly putting up bad debt?

Bad debt is that kind of debt that you will be unable to recover. For example, when a client won’t pay you after the work you have done for the client, it will be considered a bad debt for you.

Bad debt has the habit of slowly stealing away financial security from you.

Take a look at 2 signs when you will consider you are slowly putting up bad debt. 

  • When ownership of the company changes with whom you are dealing till now:

This will be an unfortunate case of bad debt if the company you are dealing with suddenly changes its ownership. The new company owner may not honor the deal the ex-owner had with you.

Then it will be an unfortunate case of bad debt.

  • When you are receiving too many unanswered calls and frequent excuses

 If your client is paying you the due money one or two days late, it is okay. But if you notice the same client has too many excuses at the time of payment every time, it will be good for you to gradually stop dealing with the client.

Otherwise, you may fall into bad debt.   

The same thing can be said about unanswered emails, calls, and messages. If a particular client is ignoring your calls frequently, it is high time to stop dealing with the client. 

You are well aware that dealing with bad debt is never easy. So, if you can read the signs from beforehand then you may save yourself from any kind of bad debt.

How can your small business be saved from bad debt?

Many small business owners do not pay much attention to uncollected dues and opt for taking out a loan in an emergency even from an unregistered loan agency. Sometimes they go for a payday loan in a crisis and then have to pay off the amount with a high-interest rate.

It is better than opting for a payday loan, and then finding ways to eliminate payday loan debt is to never give up on bad debt. You have to chalk out strategies and brainstorm ideas regarding how you can collect the payments that are still due.

You have to be determined that you will make receivable-collection your priority. It may take time but concentrating on receivable-collection is much better than letting off the due considering as bad debt.

Final words,

When you are in the small business sector, learning about how to identify the difference between good debt and bad debt is a part and parcel of your life. Remember a good debt can increase your business value and can generate income for you. Bad debt will put your small business into a loss.

Author Bio: 

Catherine Burke is a financial writer for https://www.onlinepaydayloanconsolidation.com/. She provides information on successful cash loans and payday loan consolidation to help people get over a difficult patch. She lives in Kansas and has earned a frame in the matter of payday loans.

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Showing 2 comments
  • Tara

    This is a very informative article about debts.

    I agree with “Debt has never been considered as a positive aspect of finance.” and this “Remember a good debt can increase your business value and can generate income for you.”

    Thank you, Angela!

  • Malissa

    Awesome article! This is really helpful for a business owner like me!

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