Good vs Bad Debt: What Should Business Funding Be Used For?

Working capital is essential for businesses; without it, sustaining profit-driven activities and achieving growth becomes difficult. Many businesses struggle to maintain good cash flow, prompting them to seek funding. Once funding is obtained, a crucial question arises: what should that business funding be used for? To answer this, it’s important to first understand the reasons your business may need funding, the differences between good debt and bad debt, and how to make informed decisions for balancing cash flow.

Good Debt vs. Bad Debt

Good debt is when funding is used to encourage growth in your business, generating wealth and leaving your business in a better position than before the loan was taken out. Bad debt, on the other hand, refers to funding that merely fills gaps and offers a short return on investment. This typically involves borrowing money for things that don’t hold their value, become disposable, or provide little to no return. With this understanding, the best use of a short-term loan or a merchant cash advance is for the following cash-flow-generating solutions:

1. Staff Training
Investing in staff development enhances their productivity and skill sets. Focus on training in departments that show a direct return, such as improving the skills of your sales team. Ensure that any training programs you choose are offered by reputable companies with measurable outcomes.

2. Upgrades
As an entrepreneur, you recognize the need for better goods, updated machinery, improved equipment, or additional vehicles for your growing operation. These maintenance requirements often can’t be postponed, creating pressure on the business owner. A merchant cash advance can provide quick funding for these investments, making it a form of good debt that will help grow your operations and generate long-term business.

3. Expansion
If your business is thriving and you have the opportunity to open another branch, that’s a positive sign. However, you’ll need to consider how to finance it. Using a merchant cash advance for this purpose can be a healthy decision, as the new store can create new opportunities, expand your market, and potentially double your business, allowing it to pay itself back.

4. Renovations
For certain retailers, such as restaurants, staying trendy and ensuring establishments are visually appealing is vital. Renovations serve an important branding function for your business and can be a good reason to take on debt, even if they are costly.

5. Buying in Bulk
Purchasing in bulk from suppliers can be expensive, but it often allows for negotiable terms and rates. Obtaining a short-term loan to secure the necessary working capital for a bulk deal is a smart move. A merchant cash advance can provide you with funds almost as quickly as your supplier can process your order, allowing you to increase profits and pay off that good debt.

The Bottom Line
Entrepreneurs should not fear debt, as long as it is utilized for growth-enhancing opportunities. Understanding what funding should be used for is crucial. 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.