The impacts of post covid, prices on essential items inflating and cash flow issues led to several businesses borrowing from banks. The Bank of England announced that small companies hold more than ten times their cash balance.
This debt can be highly damaging to a business and could lead to bankruptcy. Furthermore, the FPC of the Bank of England predicted that business insolvencies are likely to increase.
When people think of debt, they immediately assume something threatening. Most of the debt you hear about can be harmful. Nonetheless, debt can benefit you as well.
What Is Good Debt?
A certain level of debt can benefit business growth, allowing a business to expand its market share. Good debt is usually planned and can help with an investment.
Good debt is usually planning for the furniture and investing in something that would benefit the company. For example, a factory may buy new machinery so they can mass produce a product. This product can then be sold to more people, allowing the business to generate more revenue.
Good debt can also depend on who is lending the business money. It can also include interest rates and the type of loan the business has made. Additionally, the type of debt your customers build can also be good debt.
What differentiates good and bad debt from one another is affordability. For example, if a debt offers high-interest rates and requires very few fees, it is usually considered a good debt. The reason why is that there is a slight chance that this loan will punish you further down the line.
Different types Of Good Debts
There are many types of good debts for a business and an individual.
Mortgages
Mortgages are one of the most common debts an individual can have in the United Kingdom. You will always have to live somewhere and paying that off in one swoop is highly unlikely. That is what a mortgage is for. It allows you to pay your home off bit by bit whilst it increases in value.
Student Loan
The problem with the world is that to get a good education, you have to pay for it. The opportunities are very limited for those who are from poor backgrounds. That is where student loans come in.
Student loans deliver people from poor backgrounds the opportunity to extend their education, earning qualifications for something they like to do in the future. That is an investment in themselves, whilst borrowing money for their education.
There are a few positives to student loans. The first positive is that you don’t have to pay it off until you start to earn more money. In the United Kingdom, you only start to pay off your student loan when you start earning more than £524 per week. That equates to £27,295 per year before tax.
Small Business Loans
If you want to increase your wealth, one of the best ways to do this is to work for yourself or start a company. Being an entrepreneur can benefit you massively in the long run however it requires a lot of time and effort.
Although starting your own business may sound easy, it isn’t. One of the problems that people have when starting a business is that they don’t have a plan. A plan can help your business progress. If you don’t have a plan, it could lead to financial difficulty.
To Conclude
As you can see, good debt does exist and can benefit you. A good debt is usually an investment in yourself or a company. However, if you take a loan for a holiday or some new clothes, this is not an investment. Furthermore, if you cannot afford to pay it back then this is also considered bad debt. If you do manage to get involved with any bad debt, IVA Advice is recommended. They would be able to reduce some of the debt you pay off if you are unable to pay the majority of it off.
