The Difference Between Good and Bad Debt

Good VS Bad Credit | LoanOne

Just put it on your card

It’s now a very common practice for entrepreneurs in Australia and other parts of the world to use credit cards to finance their businesses. It is advisable to use these cards for urgent or emergency situations – where you require only a few weeks, not months, of funds to achieve an immediate return on investment. You can use plastic to buy items for your booth at a trade exhibition or to make an emergency supplier payment or a last-minute business trip to land a lucrative client or investor.

I have never been fond of debt. For many years, I’ve written about personal finances, both mine and other peoples’. And very often I’ve witnessed how debt, like cancer, can drain the life out of healthy bank accounts.

However, debt can sometimes be a good thing if used the right way. It’s okay to have a debt to pay for things whose value holds or appreciates over time; something like an affordable mortgage (emphasis being on affordable), business investment or student loan.

As you may already be aware, many businesses experience cash-flow problems every now and then, and a good line of credit or a loan can help to ease the ups and downs until the business moves past the tough periods or evolves into a more profitable enterprise. Regardless of whether you approach a big bank or a loan company, the fundamental rules of getting credit are the same. Proper planning and preparation are a must.

Before approving you for a loan, a bank or any credit institution will typically ask you for a business plan as well as current and past financial statements. They’ll also look into your personal credit history, so make sure that your credit score is in top-shape.

Shop for the best loan terms.

If there’s a bank that is willing to give you a loan, it’s highly likely that there are other banks and credit institutions that are willing to as well. The loan terms between lenders are different so you have to go through the contracts keenly to determine which loan offering is best for you.

Only borrow what you can afford to pay back. Never borrow more than the absolute minimum amount of funds you need, no matter how much money you can get from lenders.

Is credit bad

Debt isn’t evil, but it can be dangerous. Use loan money wisely and it can give you a huge upper-hand over your competitors and also improve your flexibility to secure opportunities that would otherwise be out of your reach and can actually help to take your company forward.

With that said, it is good to note that the best debt is one that has been repaid.

The 36% Ratio

How do you establish how much cash you can borrow, or more specifically, how much money you should borrow? Economists advise a personal debt-to-income ratio that is below 36%. This basically means that your total monthly loan repayments (which includes your mortgage) should not exceed 36% of your gross income. So, if you make something like $60,000 a month, you should not borrow more than $21,600.

It is fair to say that this ratio should also be applied to business loans. In this case, the ratio can be adjusted to business debt/liabilities-to-assets. As a general rule of thumb, it is wise to keep your debts or liabilities below 20% of your total business assets.