In essence, debts are all considered liabilities, but it is something that is very crucial in business that at some point, it will be necessary. Debt is something that your business use now then you will pay in the future. With this reason, a debt can either be good or bad, depending on the purpose it was used for. A well thought of plan for repayment should also be clear upfront, before availing one.
What Is a Good Debt?
Basically, a debt in business is considered good if it will increase your credit score, or your level of trustworthiness and credibility with your financial handling and management. For example, an entrepreneur of a business startup may have enough capital to begin his company. However, he sees that he might have an opportunity to expand in a few years time. He is not sure if he will have the necessary capital by then, so he sees that there might be a possibility that he will need a business loan to support his goal in the future. With this, he opts to make a small business loan, just for the sake of it, in order to build up his credit score. He pays the loan amortization diligently and on time. After the loan has been repaid, he has now earned a good credit standing with the bank.
True enough that in several years he saw the opportunity to expand as he predicted, and he found that the money he has is not enough for added capital. He then proceeded to talk the bank, asked for a loan, and since he has a good credit standing out of his loan history, the bank granted him a bigger loan this time.
Another situation considered to be a good debt is getting a mortgage. This is quite tricky, say for example, getting a real estate property. Getting a mortgage to buy a condominium unit means that you will have to pay extra interest. But since you intend to have it rented out, the rental income could actually suffice the monthly amortization for it, or you may even have some extra profit. By the time it has been repaid, you can also sell it on a higher price, since it is something that appraises over time.
Another example of good debt is student loan, which is intended for education. By investing on your competence and skills will actually help you gain more leverage for yourself in work or business.
Generally, good debts are intended to increase the value of your business in the future. As an entrepreneur, it can also improve the quality or level of your competence to be better in decision making and management with your business. Overall, good debts are essential part of a business, and most of the time it can be seen as assets rather as liabilities.
What Is a Bad Debt?
Essentially, bad debts arise from poor decision making and neglect when it comes to purchasing decisions and loan repayments. Most debts, before it is accrued, has the best intentions to begin with. But through some mismanagement or mishandling of finances, or neglecting to think it through before availing, will entail it to become your business’ liability, or even its end.
Some bad debts also come out of desperate moves because of sudden emergencies. A businessman may reach a point of bankruptcy, and will have any other choice but to avail of a loan regardless of how high the interest rate. Borrowing from non traditional and questionable sources like payday loans will actually hurt your credit score rather than building it.
It also goes down to the fact that some good debts can turn into bad debts, if not appropriately handled, such as these cases:
- The loan generally has a higher interest rate than most, or the rates are too variable.
- You do not have to capacity to pay the regular amortization, which can result in additional interests and penalties arising from missed payments, which can accumulate over time.
- You have too much secured debts, which means that your assets are all at stake.
- You compute your debts and see that you still have much even when you reach your retirement years, which at that time you will have no more sources of income.
- Your mortgage and other loan amortization payments combined take up more than 36% of your monthly gross income.
What distinguishes a good from bad debt is the value that either you gain or lose out of it. In a business, it is unavoidable to make such loan arrangements, and it is best to evaluate the situation first, and approach it with critical thinking skills and sound decision making in order to arrive at the most appropriate solution.
Reasons Why Businesses Borrow Money
Another perspective to look at in knowing why businesses borrow money is to know why it needs money in the first place. Borrowing could just mean one thing: you do not have enough for something that you think you really need. For a business, this means a need to fund an important part of your business, which could be anything at the beginning, at the middle, or towards some future expansion. In most cases, businesses borrow money because:
- It needs additional funding for capital.
A working capital for a startup or additional branch is rather a multifaceted amount, which essentially implies that it is something that is bigger upfront, but is important in order to jumpstart your business. It includes purchasing equipments, inventories, and financing customer orders in exchange for future receivables. It is important to have a sustainable and reliable working capital in order to smoothly operate your business. However, sometimes a business encounters emergency circumstances that it needs more working capital than what it originally put like seasonal trends (needs capital to add more to the inventory), unexpected economic downturn, broken equipments, fraudulent activities, etc.. Such situations call for businesses to turn to loans and additional funding from third party entities in order to continue with their operations.
- It needs to build up its credit score.
Your business credit score also implies your relationship with financial institutions and other economic players, whether good or bad. Essentially, the financial world is rather an interconnected, highly network based structure, which regards each individual credit histories as a “public” data within its system. Meaning, everybody has the right to gain access to your financial credibility score whether you loaned to them or not because your information is being circulated in their interconnected systems. That is why your credit score is being measured automatically without your information input, because each financial institution you transact with knows your history and input to it according to how you dealt with them. That is why it is important for a business to have a good credit standing with any bank or financial institution which can greatly impact your future transactions with others.
Given the scenario, some businesses, even if they have the capacity to sustain their businesses without an extra funding still avail of loans, as a part of their risk mitigation by building up their credit scores. This way, it not just achieve healthy relationships with the financial world, it also can sustain better is business without resorting to personal savings.
- It is essential for business growth.
Business growth is the strongest asset of a loan, credit wise. If proven that a getting a loan would mean more opportunities for growth and expansion for your business, will entail you a higher credit standing because it means you will have more funding to repay your loan.
What Is a Merchant Cash Advance Loan Provider?
Small businesses is gaining prevalence in the market scene, wherein according to 2016 Small Business Profile, small businesses (businesses with less than 500 employees) now account for 99.7% of all businesses in the US today.
Merchant cash advance services are becoming more popular with small businesses, as the advancements in technologies produces more opportunities for entrepreneurship today than it ever was. The market is becoming fast paced as well, thus encouraging small businesses to grab immediately whatever potential it sees with the changing market behavior, in order to keep up with it. This entails a steady, or reliable working capital in order to fund additional equipments, inventories and manpower, which may be challenging for businesses to secure immediately.
The retail sector is one of the industries that avail merchant cash advance more, since they are the ones that are utilizing the services of merchant banks through cashless payments from credit and debit cards. A merchant cash advance firm uses your business’ merchant card payments as the security for the loan that you avail, by automatically deducting a percentage of your daily cashless sales until full repayment has been made.
A merchant cash advance loan provider is the same merchant bank that facilitates your credit card and debit card payments. The transaction works by first securing an application from the merchant bank. This can be done in person or even online, because it requires minimal requirements unlike with other loans. The whole approval process will take about 24 hours to several days, depending on variable factors.
Your business can repay the merchant cash advance company by agreeing on a certain percentage of sales to be deducted as part of your amortization. Generally, interest rates for merchant cash advances are higher than most business loans, because essentially it is not a loan but rather a financial product, therefore it is not governed by rules and regulations existing in financial institutions regarding loans and its accompanied interest rates.
The repayment period is relatively short, about 6 to 8 months only. It is also considered an “unsecured loan” due to lack of need to provide collateral or other proofs of high financial capacity and business assets.
Merchant cash advance loan providers can be banks itself, or other third party lending associates that are basically credit and debit card service providers.
The best merchant cash advance loan providers are the ones that are more flexible in terms of repayment terms, because essentially they have more financial capability to secure more loans out of its high funding capability for a number of borrowers without going bankrupt.
To know more if a merchant cash advance service will suit your business needs today, check out first CrowdReviews.com’s reviews of merchant cash advance loan providers to get to know the latest client feedback about the best merchant cash advance services available today.
Keith Moore
Latest posts by Keith Moore (see all)
- What Is the Best PoS Software and How to Choose It? - January 12, 2017
- What Does Database Management Software Do for Small Businesses? - January 9, 2017
- What Are the Distinct Features of the Top App Development Software? - January 8, 2017