Whether by design or necessity, debt has become quite a normal part of a business. The first idea when you hear or talk about the word ‘debt’ is that it’s bad. But not every debt is bad, some are good. We’ve touched on the topic on good debt when looking for money for your business.
But can bad debt ever be good? And vice versa?
So, can bad debt really ever be good?
Bad debts are those used for assets that never go up in value – otherwise known as depreciating asset. But really, except for property and investments, everything eventually depreciates.
In essence, is everything bad then? That’ll probably depend on usage. Any bad debt, when used properly can help your business. Well managed finances can help you achieve a positive outcome.
A perfect example would be a credit card. If you use what you purchase via credit to further enhance your business and the offset is that you can pay your card on time as well as earning an excess, then that’s bad turned good.
However, if you use the credit card solely for luxury goods that do not net you anything except for being able to live beyond your means, then that’s bad debt, which could turn into a real problem. The high monthly interest that accrues over time may become too difficult to pay off.
Another example of bad debt are cars, especially new ones. However, if a car is used for business purposes, not only would it benefit your business from an operational perspective, you may also claim a tax deduction if it cost less than $20,000.
Can good debt ever be bad?
Absolutely so you must be careful. If you have incurred a bad debt, and is now using what you considered to be a good debt to pay it off that will just cost you years of extra interest payments. So never use good debt to pay off bad debt (unless you really know what you’re doing). Talk to your accountants and finance advisors on how to best tackle bad debts.
The argument that ‘no debt is a good debt’ has its merits. Who wants to owe money to people or establishments? But the reality is, not everyone can pay in cash or at least pay immediately. Sometimes, debt becomes a necessity. If that’s the case, then managing your finances well becomes all the more important.
A debt reduction strategy is a good first step towards growing your long term wealth. If you need advice on debt management especially debt reduction, please talk to your trusted PJT advisors today.