Good And Bad Debts In Business

Good And Bad Debts In Business

Who among us doesn’t have debts? Even for once in our lives, we have asked for someone to loan us a sum of money. In business, it is often the same. Some business owners loan money to put up their businesses; some for additional expenses that it incurs. No matter the reasons are, debt is part of our lives.

What is Debt?

According to the FreeDictionary: Debt is something owed, such as money, goods, or services; an obligation or liability to pay or render something to someone else; a condition of owing.

Debts have two types: Good and Bad.

Types of Debt

Good debt – a debt that helps you generate income and increase your net worth. A business’s good outcome is the main reason for this type of debt.

Bad debt – a debt that put no good for the business; it even depreciates your assets. A type of debt that you incur or purchase that will not benefit your business.

What’s the difference between the two?

It is how it affects the business. If the debt increases the net worth or has a future value then it is a good debt; if it doesn’t and you have to pay for it, it is bad debt.

Examples of Good Debt

Education

Regardless of the business you choose, even if you are an employee, an investment in education should essentially possess by an individual. The greater the education is the possibility of high earning potential. Education can put you in a good-paying job and will open many opportunities. Don’t think about the long journey you take; this is an investment that has a good return and can put you in a good career.

Loaning to put a small business

Putting up a small business is helpful in starting your career. You don’t have to worry about unemployment or waiting for your paycheck because your willingness and hard work will depend on your earnings; you are the boss.

Examples of Bad Debt

Automobile loans

Aside from cars are expensive, it is high maintenance. There are expenses that you have to incur in maintaining your car. Furthermore, purchasing a car is a waste of money, you often pay the interest only. There are times, our payment for the car loans only reduces the interest and not the principal amount. This is not a good investment as time will come that its value will depreciate.

Credit card loans

Like purchasing a car, credit cards, also have interests. In using this, you are paying more than you loaned, a waste of money on your behalf.

Life has no guarantee, and so does debt. From the examples given, like in education, it cannot merely provide you with wealth and success. Pushing yourself harder will help you gain it. You will experience many trials before reaching the top. The good thing about education it gives you an edge over the other; still, it will depend on your abilities and capabilities. Always remember that everything involves risk.