Not all debt is bad – why we should encourage responsible borrowing

Philip Belamant, CEO and founder of Zilch

For businesses, there’s a prevailing myth that no debt is good debt; from concerns about national borrowing, to consumers trapped in cycles of debt through credit card spending, and graduates saddled with large student loans. However, while ‘bad’ debt can create a never-ending borrowing cycle, ‘good’ debt – if used smartly – can serve as a wealth-enhancing tool. Further, good forms of debt as well as newer forms of borrowing such as buy now pay later offerings can work to ease day-to-day cash flow if used correctly. Responsible forms of borrowing can therefore be beneficial to businesses for facilitating growth, and innovations in payment methods mean there are more ways borrowing which can help start-ups and entrepreneurs when beginning their business journeys.


Good and bad debt


Good debt is typically viewed as a type of debt that is taken on long-term to improve a person’s life, providing long-term benefits which will generally outweigh the cost of the loans themselves. Student loans, business loans or car loans are all those that have the potential to allow a person to increase their income over the longer term or as tools in the production of income, while mortgages theoretically represent a wealth creation plan.


Bad debt, on the other hand, is taken primarily to pay for something someone can’t afford and is seen as a convenience-related debt, such as borrowing short-term, high-interest loans such as payday loans. Since these are offered at short-term notice, individuals seeking them are by necessity in more desperate need of quick financial gains and are consequently financially vulnerable going forward. As high-risk individuals, they are unlikely to be able to meet future payments, and liable to quickly become trapped within a cycle of debt.


Credit cards are another form of debt deemed ‘bad’, since they’re often used as an extension of the pay-check. They are revolving debt, which makes it easy to continue borrowing even after making monthly payments and come with variable interest rates and often complicated T&Cs that can leave users vulnerable to taking on further debt without realising it.


New payment offerings


Cashflow is one of the greatest problems a business has to face, as businesses wait on clients to pay bills so they can pay theirs, and for customers to spend in order to generate revenue. New forms of debt, such as transparent buy now pay later offerings, can provide users with the ability to spend using staggered payments which sees them pay on invoice rather than taking on ‘bad’ debt. By implementing these new offerings into payment methods, businesses can encourage consumers to take on more responsible forms of borrowing. Customers are thus able to make purchases more often and more regularly, since their cashflow is improved.


Businesses are as such able to benefit from more regular and frequent spending, as well as higher average transaction values and more normalised sales distributions month-to-month; since customers are able to spend mid-month instead of waiting until pay-day. The normalised sales distribution thereby generated means improved cashflow and predictable forecasting, which is good for businesses starting out and reduces the need for deep discounting promotions.


Millennials are the most likely to take on these new forms of borrowing, being more averse to taking on debt than other generations, with many young adults in their mid-20s to mid-30s not using credit at all. With millennials desiring more control and transparency over their finances, forward-looking entrepreneurs need to find ways to target this demographic and offer flexible, interest-free credit agreements. Business leaders need to integrate flexible, transparent credit options that allow consumers to pay over time for purchases that don’t catch them out through interest charges or hidden fees. By encouraging young professionals to take on responsible levels of good debt, more spending power will be put back into the economy— which can only be good for business and the consumer!