Good vs Bad Debt: What should business funding be used for?
Working capital is like air for business, without it your business cannot sustain its profit-driven activities and will not grow. More often than not, most businesses find it really challenging to maintain good cash flow, leading them to seek funding. Then once obtained the million-dollar question is what should that business funding be used for? To answer that question, let’s first take a look at why your business may need funding in the first place. Let’s understand the differences between good debt and bad debt. And then let’s use this information to figure out how to make good decisions for balancing cash flow and how to cleverly use funds to fuel your business ventures.
Good debt vs. bad debt?
The best type of debt is when funding is used to encourage growth in your business. This generates wealth and leaves your business in a better position then it was before the loan was taken out. Bad debt refers to funding that plugs holes and has a short return on investment. This describes borrowing money to pay for things that don’t hold their value, become disposable or has little to no return. With this all in mind, the best use of a short-term loan or a merchant cash advance is on some of the following cash-flow generating solutions:
When you invest in your staff and develop their skills, you are enhancing their potential for productivity and honing their skills. So focus on training in departments that can show a direct return like upping the skills of your sales force. Of course, not all staff training is created equally so make sure that any programs you enrol in are from reputable companies with measurable outcomes.
As an entrepreneur you understand that you will always need to purchase better goods, update machinery, buy better equipment or add vehicles to a growing operation. These types of maintenance requirements often can’t be delayed, putting a lot of pressure on the business owner. Here is where a merchant cash advance can help as this quick funding solution (when used on this type of investment) equates to good debt. Owing to the fact that it will grow your operations and bring in more business long term.
Say your business is doing well and there is an opportunity to open another branch- that’s great- right? Absolutely, but how are you going to pay for it? Here putting yourself into good debt with a merchant cash advance is a healthy decision for your business because your new store will be able to generate new opportunities, create a new market for your brand, potentially double your businesses and pay itself back.
Certain retailers like restaurants need to keep up with the trends and ensure their establishments are stylish, appealing and Instagram-worthy. In this case renovations aren’t necessarily purely cosmetic as they fulfil an important branding element for your business. So, while renovations are pricy, they are a good decision to take on debt.
Buying in bulk from your suppliers is expensive but if you are able to do this, your supplier will be negotiable on both terms and rates. So, obtaining a short-term loan to acquire the necessary working capital that will facilitate a bulk deal is a good call. Best of all a merchant cash advance will provide you with funds almost as fast as your supplier needs to allocate your order. Now you can increase your profit and begin paying off that good debt.
The bottom line
Entrepreneurs should not be afraid of debt so long as the debt is used for growth enhancing opportunities. This is a crucial when it comes to understanding what funding should be used for. Now the only two questions you need to ask yourself are: Is my business ready to grow and where do I sign? For more information on good debt contact Merchant Capital today.