Much has been touched on the issue of good debts and bad debts. In terms of personal debts, most personal financial advisers would generally advocate that consumption debts like credit cards and hire purchases are bad debts.
Banks do tend to charge a lot for unsecured personal loans.
Debts incurred for loans like education loans however are considered good debt since there’s a good chance that the expected increase in income in future can cover the interest charged.
Singapore small business loans, if used prudently can also be a good debt for a company. Let’s take a very simple illustration on how a small business can take advantage of a business loan to generate higher growth.
Small companies don’t want to miss opportunities to scale up
Company A imports product X for $1 and sells it off for $2. Business is growing and it receives 10 orders for product X. However, it has only sufficient capital to fulfill 5 orders. Company A would then take a $5 loan from the Bank, which charges 10% interest for every dollar lend. Company A would still pocket a 90 cents profit per product after accounting for the interest charged by the bank.
This is just a simplified example on how companies leverage on financing loans to meet growth and demand, a popular concept also known as using OPM (other people’s money). The bottom line is: As long as the business can generate higher revenue/mark up than the interest charged by the bank, then a business loan would be considered a good debt.
Apart from fuelling revenue, business loans could also be used as a vehicle for tax reduction. The current corporate tax rate in Singapore is at 18% on chargeable income. The market rate for unsecured business loans is around 5%-10%.
If a company uses debt wisely and do not over gear, debt is not costly. Best of all it can be offset against taxable income.
If you are a SME boss and perhaps there are a few shareholders in your company, it may not make sense to get Singapore housing loans in order to obtain capital if the other shareholders are not chipping in.
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