This article is for informational purposes only and should not be construed as legal or financial advice.
Smart borrowing means more than just using smart lending technology to obtain a loan. It also refers to knowing how to use the funds wisely to avoid falling into the pitfalls that purposely taking on poorly planned debt can create.
In this article, we are going to discuss strategic borrowing – correctly planned borrowing that, in the long term, will improve a given financial situation.
Good Debt Vs Bad Debt
Good debt is debt entered into to fuel the growth of wealth. It can also be debt in the form of a consolidation loan, used to negate bad debt.
Bad debt, on the other hand, simply drains wealth. It can lead you to be in an even worse position than you were before you shouldered the debt.
On the personal level, one illustration of good debt would be when someone takes on a mortgage to purchase their home, which, all things being equal, should appreciate in value over time.
An illustration of bad debt would be someone who uses loan money to fund a lavish holiday they could not otherwise afford.
On a business level, good debt might be entered into to secure a loan for new equipment (or even premises) that will increase production, sales and profitability.
Bad business debt might be taking unplanned-for loans in order to keep trading in a negative cash flow situation, without having a plan on how to manage cash flow more effectively.
The Practicality of Debt
Some might say that the only way to avoid the pitfalls of debt is not to get into it in the first place. In a perfect world, that is, of course, correct. But the world in which we live is far from perfect. Most businesses would never even have gotten off the ground without loan finance, and once established, most trade in debt, having to pay for and provide goods and services before being able to charge for them.
On the personal front, taking a consumer loan might be the only way that a student can fund a university education, or taking on a mortgage is usually the only way that a first-time buyer can purchase their home.
Debt is a fact of life. The important thing is using it for the right reasons, being able to afford to make the repayments in a timely manner, and knowing how to manage your financial circumstances going forward.
Managing Debt in the USA
The best way to manage debt is through planning. Insufficient or poor planning can lead to acquiring debt that you cannot afford to pay back. At worst, it can lead to personal bankruptcy or forced corporate closure.
On the business front, Forbes, the renowned and respected US business magazine, has published a useful document entitled ‘Effective Debt Management Strategies For Growing Your Business.’ It covers things like:
Getting to grips with your debt.
Creating a plan to repay the debt.
Improving the management of the company’s cash flow situation.
Increasing revenue income.
The refinancing or consolidation of debt(s).
Getting the right advice
Regularly updating financial plans.
Advice on the personal rather than corporate front from Experian is remarkably similar, with the exception of comparing debt payoff strategies. However, it’s something that applies to both scenarios, and this is where smart loan tendering comes into the picture.
The Switch to Data-Driven Smart Lending Decisions in the USA
It used to be that the only source of loans was the banking network. Decisions to approve loan applications took a long time and were usually based on credit scores of transaction histories. That has now changed.
The appearance of smart, digital, alternative finance platforms is challenging and disrupting the status quo. Rather than the old ways of evaluating credibility, the alternative finance sector uses information from other data sources such as social media, online presence and behaviour.
The loan application process is much faster, and the percentage of offers being approved is significantly higher. As a result, the alternative finance sector, and the introduction of digital loan comparison platforms in particular, is claiming a continuously growing share of the consumer and business loan markets, and not just in the US.
Consumer Loans in the Netherlands and Business Loans in the UK
Digital loan brokering has also become very popular across Europe, including countries like the Netherlands and the UK. Here, you will also have access to various loan brokerage sites. Most of them have instant loan repayment calculators on their platforms. They’re the first and perhaps most important stage of planning. They allow you to evaluate how much the loan repayments will be per month for various loan amounts over different repayment durations simply by adjusting the sliders.
As an individual consumer, you can apply for a consolidation loan and reduce the value of your monthly repayments, or as a business, you can set up a credit line or invoice factoring deal that allows your company to continue trading while you implement plans to increase revenue.
Carefully calculated student loans are a way of investing in your own future. Carefully calculated business loans to cover the costs of raw materials or the purchase of new capital plant to increase the volume of efficiency of production are ways of investing in your business’s future.
Closing Thoughts
The examples we’ve discussed describe either borrowing money to make money or borrowing to improve an undesirable financial situation. Proper planning and execution via one of the new loan tendering platforms to choose the best loan options available are examples of smart borrowing that will ensure that if you are taking out a loan, you steer away from the potential pitfalls discussed and reap the financial benefits in the long term.