Making the Most of Your Business Financing: Separating Good Debt from Bad

Making the Most of Your Business Financing: Separating Good Debt from Bad
Discover how good debt can affect your business’s long-term financial future while bad debt has no long-term value and drains resources.
by Square Jan 31, 2023 — 5 min read
Making the Most of Your Business Financing: Separating Good Debt from Bad
Whether you’re just starting out or have been in business for years, the idea of taking out a loan can be a scary one. How much do you borrow? Where do you borrow from? Can you afford it? What if sales fluctuate?

You’re probably asking yourself these questions and a hundred more if you’re considering business finance. And you’re not alone – more than two-thirds (71%) of small business owners don’t use any debt products when running their businesses. It’s common for entrepreneurs to question whether a business loan is what they need. There’s still a stigma attached to it, as if it somehow indicates a failure on your part to run your business successfully.

In fact, businesses without previous debt experience are likely to be uncomfortable with taking on credit (68%). If we compare these businesses to those that have taken on debt in the past, the minority are uncomfortable with credit (46%). Female business owners are even more uncomfortable around debt than men – 70% feel uncomfortable taking debt on, compared to just 37% of men.*
But debt shouldn’t be viewed as a mistake. Rather, debt can be an investment in your business vision, a way for you to achieve your goals and take your business to the next level.

So, how can Square help make debt a little less scary? We take it back to basics. It’s important to understand the difference between good and bad debt, and how this applies in a business context.

What is good and bad debt in a business context?

We’re all conditioned to think of debt as scary, or something we shouldn’t have. For some types of debt, this is true, but not all debt is bad: some debt is good and even beneficial to you and your business. It’s important to step back and look at the kind of debt you are entering into in the context of your business circumstances. Let us explain with two examples below.

Credit Cards

21% of business owners are likely to take out a business credit card, while 17% would consider a business loan.* In some circumstances credit cards can be risky, some come with hefty interest rates, sometimes 18% or higher and if you don’t pay it off straight away, it can send you down a tricky path. However, if you have access to a credit card and are able to pay it off before the interest-free period ends or continually paying on time each month, this may be the option for you.

Business Loans

If you are worried about being able to make payments on an unstable income, a business loan may be better for you. With Square Loans your repayments are dictated by your sales. Having a big day? You will pay back a little more. Slow day? You will pay a little less. This can be an excellent way to help manage your finances. But, if you have taken out a loan or credit card that is beyond your means, then this might be considered a bad debt for your business to take on.

How to recognise good vs bad debt for your business?

Good debt can be summarised as debt which helps you grow your business and that you can afford to repay.
Bad debt can be a loss your business incurs e.g. a customer failing to pay an invoice, or it could be a credit card or loan with high-interest repayments which become unmanageable – these debts cost you more money than they generate.
Here are some easy tips to help manage your debts and finances.

Bill promptly – If you want to get paid on time, invoice your clients as soon as a job is complete. Square Invoices help you keep track of who owes what and when, as well as allowing them to pay easily online 24/7.

Credit checks – When you team up with a new client, perform a credit check first.

Limit credit accounts – Set a limit on how much a client can owe before payment must be made – that way you can ensure they never run up a huge debt they could default on.

Robust trade terms – Make sure a client knows when and how you take payment. Structure terms to encourage prompt payment e.g. offer an early payment discount and contact a customer as soon as any payment is late.

Limit business credit card use – Don’t rely on it for cash flow and only use it when you know you can comfortably pay it off.

“I’m starting to learn that there are some good debts to have”: How Sascha prepares for the unknown with Square Loans

When Sascha Laurenson started her farrier business, High Performance Hoof Care, she spent the first six months building a client base as an unknown quantity. Financially, things were tight, but little by little she gained customers, built a reputation and turned her fledgling venture into a thriving business.

Nobody knew me, so why would people pick me?’ she says. ‘I didn’t feel confident enough to really push myself.”

“Now I can be selective. I might take on one out of five of the people that contact me. So that’s a good problem to have for a small business.”
Sascha, from Goulburn, NSW, began using Square Loans during the pandemic when supplies were scarce and to invest in her business’s future.
She says, “It was getting hard to source stock, and there were a few tools that I really wanted to buy. As we got further into the pandemic, that little loan kept popping up on my dashboard. I thought, “Maybe I could get a whole lot of stuff in one heap.”It feels so much better knowing that I’m prepared.”

How can Square Loans help my business?

Square Loans are a great alternative to traditional bank or business loans, giving business owners greater control and flexibility over their cash flow.
If you’ve been taking payments through Square for at least six months, you might be eligible to apply for a loan. Rather than being based on your credit rating, Square uses its algorithms to analyse your daily business transactions and make you a loan offer based on that. Other benefits include:

How Square Loans work

Once you’ve been selling for six months with Square, we will begin assessing the card sales you process with Square to see if you’re eligible to apply for a loan. If eligible, you will receive a loan offer based on your business history with Square, and you can apply anywhere from as little as $100 up to your maximum loan offer, depending on what you need – you’re in control, and you choose how much to take.

If approved, you will repay the loan by dedicating a portion of your daily sales to repayments. You’ll repay more when you’re busy and less when you’re slow. If things slow down a bit, you have 18 months to pay the loan back in full. There is a requirement that you meet a minimum repayment amount every 60 days.

Square Loans removes many of the barriers small businesses face when applying to traditional lenders. With Square Loans, you get the finance you need quickly and easily, so you can concentrate on building your business and doing what you love.

This article is only for educational purposes and does not constitute legal, financial or tax advice. Make sure you consult a professional regarding your unique business needs.

All loans are issued by Square AU Pty Ltd. (ABN 38 167 106 176). Valid Australian bank account is required. Actual fee depends upon payment card processing history, loan amount and other eligibility factors. A minimum payment of 1/18th of the initial loan balance is required every 60 days and full loan repayment is required within 18 months. Loan eligibility is not guaranteed. Eligibility criteria include consistent and continuous payment card processing through Square. All loans are subject to credit approval. Terms and conditions apply.

The Square Loans Australia Survey statistics are based on an online survey of 467 Australian small business owners over the age of 18, conducted between April 3 and 8 2022 by Block, Inc., Squareup Pte. Ltd. Results are representative of Australian small businesses in line with the number reported by the Australian Bureau of Statistics Counts of Australian Businesses, including Entries and Exits August 25 2022. The study has an overall margin of error of ±6% at the 95% level of confidence.

The Bottom Line is brought to you by a global team of collaborators who believe that anyone should be able to participate and thrive in the economy.


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