Good business debt vs bad business debt

Examples of good debt

Investing in assets that improve productivity

Borrowing can be beneficial when it helps your business operate more efficiently, reduce costs or generate more revenue.

For example, investing in equipment, vehicles, technology or premises may create long-term value if the benefits outweigh the cost of borrowing. Peter Charlesworth uses the example of a joinery business purchasing equipment that reduces labour costs and improves productivity.

Supporting business growth

Debt can sometimes help a business grow faster than it could using profits alone.

Borrowing may allow you to expand your operations, increase capacity or pursue opportunities that would otherwise take much longer to fund.

Managing short-term cashflow needs

Overdraft facilities can help bridge the gap between paying expenses and receiving customer payments.

For some businesses, this can be a flexible and cost-effective way to manage short-term cashflow fluctuations.
Learn about business overdrafts and how they can help manage cashflow fluctuations.

Examples of bad debt

Borrowing for work that doesn't generate profit

Taking on debt to support work that isn't profitable can create ongoing financial pressure.

Similarly, borrowing to pursue opportunities where payment is uncertain may increase risk without delivering a clear return.

Purchasing assets with limited business value

Borrowing for assets that aren't regularly used or don't contribute meaningfully to business performance can strain cashflow and reduce financial flexibility.

Any investment should have a clear purpose and benefit for the business.

High-interest borrowing

Expensive lending can quickly increase costs and make debt harder to manage.

Before taking on debt, it's important to understand the total cost of borrowing and compare your options carefully. Peter Charlesworth notes that businesses should avoid relying on high-interest third-tier lending where possible.

How much business debt is too much?

There's no single amount of debt that's right for every business.

What's important is whether your business can comfortably manage repayments now and continue to do so if circumstances change. Peter explains that debt levels should allow a business to withstand unexpected challenges rather than operating with little room for error.

Before borrowing, consider:

• Can my business comfortably afford the repayments?
• Would repayments still be manageable if revenue decreased?
• Will this borrowing help generate income, improve efficiency or support growth?
• Have I considered other funding options?
• Do I understand the full cost of borrowing?

If you're unsure, talking through your plans with a trusted advisor, accountant or business banking specialist can help you assess the risks and opportunities.

Borrow with a clear purpose

Debt isn't inherently good or bad. What matters is whether it helps your business achieve a specific goal and creates value over time.

Borrowing that helps your business grow, improve productivity or manage cashflow may support long-term success. Borrowing that creates financial pressure without delivering sufficient value can have the opposite effect.

Understanding the purpose of the debt, the benefits it will deliver and your ability to comfortably repay it can help you make more confident borrowing decisions.
Discuss borrowing options and funding solutions tailored to your business.