Why Not All Debt is Bad Debt

As is the case with all businesses in the world, they are always going to be facing debt.  But, debt is not always a bad thing.  Debt can be used for many reasons such as upgrading facilities, investing in new technology, and even for financing new products.  How a company uses the debt and handles the debt is what makes the all the difference in the world and determines whether the company will be successful or not in the long run.  There are many incentives for a company to have debt.

First, one major reason that a company wouldn’t mind having debt is because it can become a major tax break for a corporation.   Tax rates on corporations are extremely high and the government allows corporations to deduct their debt from their corporate income taxes.  This highly encourages companies to continuously spend money because it will save them money in the long run.

Another reason that a company may not mind having debt on their books is because  having debt would be cheaper than financing projects through equity.  Equity financing becomes expensive because while you are not obligated to pay shareholders any form of dividends, they are still going to expect a certain rate of return.  Financing through debt eliminates that shareholder expectation on an investment and a bank loan will typically result in a lower rate of interest.

Debt can be extremely beneficial to a company as long as it is handled in the proper way.  Improvements, repairs, and things of that nature would not always be possible if it weren’t for debt.  As the saying goes, ”you have to spend money to make money.”  Spending money is the only way for a company to ensure it will continue to grow and prosper.