Good Debt vs Bad Debt – When to Take Business Debt?

Funding is often a major issue for startups and newer small businesses. Several loan programs are available to help entrepreneurs get the cash they need to finance the operating cycle, but borrowing money can also be costly.

How can you tell when it’s a good idea for your business to take on debt? Here is a little financial food for thought:

Good Debt

It is a smart idea to take out a loan when the upfront money will increase your firm’s net worth or help save costs in the long run. This can include things like installing solar panels that will eventually cut your company’s energy costs dramatically and generate large savings. Good debt might also include a commercial mortgage for business property – a warehouse or office space, for example – that would be tied to a physical asset that is likely to increase in value over time.

Taking out a small business loan for a piece of equipment or system that will save your firm time can be a wise investment as well. When the owner or employees can do their jobs in less time, it boosts productivity, hopefully increasing revenue and profits.

Bad Debt

It is a bad idea to take on small business debt when the interest rate is exorbitant, like with many payday loan outfits. It is important to be sure you will not be paying more in interest and fees than the product you are financing is worth.

Also, consider how the services, products or equipment you are financing will add value to your business. If it won’t speed up your production cycle, save you money overall, or bring in added clientele, it may not be worth the borrowing costs.

Neither is it a good idea to borrow money simply to repay existing debt. Borrowed money is best used when moving the business forward, not just keeping it from digressing.

Borrowing for business needs makes sense when you plan to use the money to grow your firm. Be sure to shop around among lenders for the best interest rates and terms. Do the math to know if the investment will pay off for your company.


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