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In Australia, debt is often considered a dirty word. But for many businesses, debt is a healthy way to grow and flourish.
Here’s how to distinguish good debt from bad debt. One way to think about debt is like fat in a diet – there are types of debt that can make your business healthier, and debt you want to limit.
Likewise, used incorrectly and in excess, debt can bloat and hamstring your business. But used wisely, good debt has the potential to boost the health, net worth and income of your business, making more money in the long run.
What is good debt?
In essence, good debt can be defined as a sensible investment for the financial future of your business. Essentially, good debt allows a business to leverage capital they didn’t have access to in order to increase their returns. Good debt is money you borrow that will be used to produce more money. The money you make from putting debt to good use will be more than the associated interest payments and costs.
Student loans, business loans, motor vehicle loans and mortgages can all be examples of good debt. For example, if a planned business expansion was going to require a loan of $150,000 and the total interest and cost per year was 10% ($15,000), and you believe the expansion will deliver you an extra $50,000 profit annually, then this would be considered a good debt.
What is bad debt?
On the other hand, a bad debt is generally something that costs you more than what you get out of it. Bad debt is money you borrow that will not give you a higher return in the long run and can reduce your wealth in the long run. Debt can become bad debt if the funds are not used to generate further income, or the interest rates and cost of the loan are way too high.
Let’s assume a business borrowed $150,000 at an interest rate of 10% ($15,000) to purchase more equipment, but the new equipment was barely utilised due to the business losing a major contract. That could be considered a bad debt because the business would likely end up paying the $15,000 in interest without earning an income greater than the cost to service the debt from the use of the equipment.
How to determine good debt vs bad debt
When it comes to determining whether the business finance you’re considering will be a good debt or a bad debt, it’s important that you crunch the numbers.
We recommend you ask yourself the following questions:
- How much money can I make from the funds I borrow?
- How much interest and costs will I have to pay for the debt?
- Will I be in a positive financial position in the long run?
- How long will it take me to reach that positive position?
- Can the money be used elsewhere for a better return within a shorter time?
- Am I spending beyond my means?
You also need to consider what the lender will use as security for the loan. It’s not always a good idea to put assets such as your home down as security for the loan as there is could be a risk of the investment going bad.
First ensure that you can afford to borrow the debt and that you can afford to meet all future repayments. Most debts will require monthly or regular repayments to ensure the loan is paid off.
Unsecured Business Loans
The good news is we offer small business loans that could help you grow your business income and profits.
All you need is an ABN and 6 months in business to apply for a loan. Best of all you don’t need to provide financials or any security for loan amounts less than $150,000.
The amount you can borrow is based on the turnover [gross income/revenue] of your business, which is verified by your last 3 months of business bank statements.
As a general rule you can expect to borrow 100% of your monthly business turnover – for example, if you have $50,000 in monthly revenue you will qualify for a $50,000 business loan.
>> GET STARTED – For more details and to apply visit xpressbusinessloans.com.au
Does your business qualify?
If your business has a turnover of more than $5,000 per month and can demonstrate at least 6 months of trading for a new business, or at least 3 months if you’ve purchased an existing business, we can help.
What you need;
– An active ABN [been in business 6 months]
– 3 months of business bank statements
– Minimum $5,000 in monthly turnover/revenue
Loan Features;
– Borrow $5,000 – $300,000
– Loan rates from .75% per month
– 100% Unsecured – No collateral required!
– Low Doc – No financials required!
– 3 to 36 month loan terms
– Cash flow friendly repayments [daily, weekly or fortnightly]
– Approved and funded in as little as 24 hours!
– No hidden fees
– No interest penalty for early repayment
>> GET STARTED – To apply visit xpressbusinessloans.com.au/apply
For more details feel free to call 08 8451 1500 or email us with your query.
Cheers,
Sam, Matt & Andy
Urbantech Finance
PS. Remember, with just an ABN and 3 months of business bank statements you can borrow up to 100% of your monthly turnover. Borrowing money for your business does not get any easier than this!
We hope you enjoyed our post: Good debt vs bad debt