See how good debt can help grow your business
Setting up or growing a business takes good financial management. Your cash flow, savings reserves and debt levels all play a part in how well your business performs.
An important measure of performance is how agile your business is when opportunities arise. If you want to expand, upgrade or make capital purchases, you need to weigh the cost against the return, especially if a venture means taking on business debt.
Recognise the difference between good debt and bad debt. Good debt allows you to increase your net worth or helps you generate value.
Examples of good debt can include borrowing for a home or property, taking a loan for education or training, and getting finance for any investment that will improve or increase your net value over time.
Bad debt, on the other hand, is when you borrow to invest, but the investment results in your net value declining. For example, a car loan would generally be bad debt.
Generally you would consider a business loan only if you think your business is worth the investment and the loan will improve the net value of the business over time.
What’s the loan for?
How much money do you need, and what’s it for? Do you need to manage fluctuations in your cash flow? Or do you need funds to buy property, equipment, vehicles or inventory? What you need the money for could help determine what kind of financing you need.
What kind of financing should you get?
There are several options to consider when getting financing, including:
- small business loan
- line of credit
- overdraft facility
- equipment leasing.
If you’re worried about cash flow fluctuations or if you need the money on a regular basis, an overdraft or line of credit may be the best option. But if you’re after funds to buy new equipment, you’ll probably need money upfront in the form of a business loan.
Getting the right terms
You’ll also need to think about whether you’d choose a fixed or variable interest rate, what kind of loan security you’d be able to provide, and whether you’ll have to pay one-off fees, regular fees or both.
Fixed or variable interest?
This will affect your repayments, overall cost of the loan and the loan features available. With a fixed rate loan, you won’t have to worry about interest rate moves, but with a variable rate, your repayments can increase or decrease accordingly. The choice of variable or fixed rates may depend on how much cash flow your business generates after you have paid all your expenses, including loan repayments. If your cash flow is in doubt, a variable rate loan repayment may rise beyond what you can afford.
What security can you provide?
Business loans can be secured by assets like residential, commercial or rural property, as well as business assets. There may also be some unsecured loans available, but these often come with a significantly higher interest rate. Generally, the less security you can provide, the higher your interest rate could be. It’s important to note that the lender has the legal right to seize any security you’ve offered if you’re unable to repay a loan.
What fees will you have to consider?
Depending on the type of loan you get, there could be one-off fees, such as establishment or application fees, exit or discharge fees and even early termination fees. There could also be regular fees, such as service fees or account fees. Don’t forget to factor these into your business expenses.
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It’s important to consider your particular circumstances and read the relevant Product Disclosure Statement or Terms and Conditions before deciding what’s right for you. This information hasn’t taken your circumstances into account.
This information is provided by AMP Bank Limited. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relation to products and services provided to you. All information on this website is subject to change without notice.
The credit provider and product issuer is AMP Bank Limited, AFSL 234517 and Australian Credit Licence 234517.