Good debt or bad debt: Get the best out of your business loans.
Getting and using business loans effectively is an essential part of life for businesses of all sizes. It's not a 'one
of' activity - most businesses will need several loans at different stages in their development.
Loans may be used for many purposes:
* Initial capital investment
* Sales drives
* Developing new products
* Acquisitions and mergers
* New premises
* New production equipment
Understanding the difference between good debt and bad debt
For most businesses business loans are essential. Yet many small business owners fail to achieve their potential as they
are scared of entering into debt. Canny business people know that there are two kinds of debt. Good debt is the sort
that makes you money. Bad debt is the sort that costs you money.
Good debt is the only type of debt to have. When you apply for a business loan make sure you know precisely how you are
going to profit from the investment and you should find the process very easy.
Even if you have spare capital it can often be better to finance new initiatives using a business loan. Should anything
go wrong a properly structured business loan will limit your personal liability. If you use your own capital you could lose
everything.
Good debt provides a positive return on your investment - it is up to you to maximise that return through the optimum mix of
cash and loan.
Most loans obtained without adequate analysis usually end up as bad debt. There is a tendency for managers to think they
know precisely what is required but fail to check with the market.
Developing new products or services can be very expensive. Logically, such major investment should be market led.
All too infrequently do we see adequate market research as a precursor to obtaining business loans for service development.
Not surprisingly much of the finance raised becomes 'bad debt'.
Getting Started
Preparation is the key to ensuring all your business loans become good debt. The terms of the loan, the balance between
capital or equity investment, and even the interest rates you have to pay are secondary to ensuring you are entering into 'good
debt'.
Just as there are many different reasons for seeking business loans there are many different sorts of business loan and many
different lenders. The articles on this site illustrate many of the different loan instruments and tools available to help
you fund your business.
To get started why not read this article on Getting
Small Business Loans Success?
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