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What Is The Difference Between Good & Bad Business Debt?

What-Is-The-Difference-Between-Good-&-Bad-Business-Debt-MPM-Capital-Singapore

Business loans are tools; use yours wisely, and you can advance your business. Buy equipment, expand your inventory, hire talented people, and advertise your products to generate more sales.

But if you’re not good at managing your loans, you’ll get into bad business debt.

Read below to find out how to stop that from happening, as we discuss the difference between good and bad business debt.

 

Good Business Debt

Here’s a straightforward way to identify a worthwhile business loan:

It will pay for itself.

Let’s take invoice financing as an example. If your company is growing, you need more equipment and employees to keep up with this growing production.

That money doesn’t appear out of thin air, though; so, if you already have some invoices from your customers, use them as collateral in an invoice financing loan. That way, you can get the money you need based on those invoices so that you can scale up your SME.

That’s just one example, though. Basically, any business loan that brings you a significant profit can be considered good debt.

Here are other instances:

1. Low-interest Loans

If you qualify for a low-interest business loan and inject that money into your company, go for it.

Suppose you need expensive software that would increase your revenues by 7%, and the loan for which you qualify has a 3% interest. Now, the simple math tells you there’s a 4% increase in profit that you can benefit from.

You can use that to grow your business further, either expanding on a new market, creating more professional solutions or hiring more people. The world’s your oyster.

2. Collateral-Based Business Loans

Your SME may have assets that aren’t making you any revenues. One example is inventory that you don’t need.

Put that excess inventory as collateral to obtain a low-interest loan. Once you get that loan, you can use it as working capital or invest in better equipment.

Plus, that collateral doesn’t necessarily have to be excess inventory. Many SMEs use their commercial buildings as collateral, so they can obtain much lower rates than using their CEO’s stock portfolio.

3. Borrow-To-Buy-Now Business Loans

Sometimes it’s wise to get a business loan to buy the things you need now, instead of simply renting them.

Here’s one example:

You own a restaurant. If your business is picking up, your landlord will find out, and they’ll increase your rent accordingly.

Or let’s say your SME is involved in trade commodities. So, if your analysis points to a massive price increase soon, it makes sense to borrow money now so that you can buy that commodity before its price increase. That way, you can keep your profit intact.

Warning: Make sure that upcoming profit can cover the price of your loan, including installments, interest, and processing fees.

4. Business Loans To Maintain Cash Flow

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Running a business will always require some cash flow. A healthy cash flow is essential.

Let’s say you need to purchase some equipment for your SME that’s worth $350,000. For the sake of argument, let’s also say you have all that money in your bank account.

So, if you use your entire balance for purchasing that equipment, you’re at risk for severe cash flow problems in the future. As a result, you won’t be able to pay your employees’ salaries or your suppliers during a dry spell.

And, of course, you couldn’t invest in more high-tech solutions that would expand your business.

5. Debt Consolidation Business Loans

If you already have multiple business loans with high interest rates, you can amass them into one. This solution benefits you because:

– You can obtain a lower interest, especially if you’re using collateral for the new loan

– You can negotiate a longer tenure

– Your monthly installments will lower accordingly

The result is you’ll be able to repay this new debt without any hiccups.

 

What You Need To Know About Bad Business Debt

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Now that we’ve discussed some helpful business loans, let’s see what bad business debts are.

These loans are easy to recognise post-factum because they don’t increase your profits. They don’t even keep your company at the same level it was before.

Here’s how can you recognise bad business debt before you get into it?

1. Instead of shopping around for a low-interest loan, you avoid research. So, you sign an expensive loan contract.

2.You want to avoid using your property as collateral for fear of not losing it. However, unsecured business loans have higher interest that your potential profits may not justify.

3. You take a borrow-to-buy business loan; only the thing you’re buying is useless. Either it generates no profits (like an expensive renovation), either it’s a money hole (like expensive equipment you’re not using but have to pay for maintenance).

4. You take a business loan without any purpose. Instead of using your loan to maintain cash flow, you’re simply wasting that money on unjustified pursuits. Alternatively, you could be sucked into an investing scam.

5. Instead of getting a debt consolidation loan, you take on yet another expensive business loan to keep you afloat. That’s a bad idea because you don’t want to increase your overall debt; you want a tool that makes it easier to repay.

 

Getting The Best Affordable Business Loan With MPM Capital

As you can see, bad business debt usually stems from fear and from not thinking things through. To avoid that, consult with the best experts from MPM Capital.

Don’t miss out on business opportunities! Apply for a reliable and quick business loan here, and you can get up to $2 million to grow your business.

 

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