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What Is Good Debt vs. Bad Debt for a Company?

Overwhelming debt can leave an individual feeling hopeless. Debt especially has a negative connotation for businesses because it could mean that they don’t have sufficient cash flow to fund business operations. However, there are cases where debt can help large and small businesses long-term without it having a negative impact on their finances.

Below, our New York debt relief attorneys explain the difference between good and bad debt.

Good Debt

If the debt you take on helps your business generate profit and expand your business, it can be considered positive. Borrowing money gives businesses access to funds that can help them benefit from economies of scale, expansions, while covering new variable costs. All of these can help a business expand and help get the cash flow needed to repay debts and continue investing in the business.

Debt can be beneficial to your business if it helps you with the following:

  • Build your business credit
  • Hire staff for business expansion
  • Mitigate risk
  • Grows your business
  • Increase profit & ROI (return on investment)

Bad Debt

Debt is considered “bad” if you are borrowing to purchase a depreciating asset. If what you are spending on won’t generate value in your business, you shouldn’t go into debt to buy it. For example, if you want to purchase a new top-of-the-line company vehicle because you think it will improve your brand image, purchasing the vehicle won’t technically help your business.

Although brand image is important, being strategic with your purchases and debt will help your business in the long run. The key is to determine if the purchase (and debt) will generate ROI.

If your business is dealing with bad debt or unmanageable debt, contact us today at (516) 217-4488 or online to schedule a consultation!

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