When economists talk about debt, they sometimes use the terms "commercial debt" and "consumer debt." These two terms have very different meanings, although both terms refer to the fact that more money has been spent than is immediately available. Understanding what each term means allows you to understand the ramifications of taking on each type of debt.
Basic Difference
The most defining difference between consumer and commercial debt is that commercial debt refers to debt associated with a business, while consumer debt refers to personal debt. Commercial debt may involve dozens, hundreds or even thousands of people at a time, depending on the size of the company and whether the company has offered shares. Consumer debt usually refers just to a single person -- that is, to the debt you accrue on your own. However, sometimes people use the term "consumer debt" to refer to all the personal debt for an entire household, or to the personal debt all individuals have collectively in a jurisdiction. Consumer debt funds consumption, while business debt funds capital.
Uses
Commercial debt is associated with businesses and therefore funds things like startup, equipment purchase, training programs, business land or building purchase and product development and manufacturing. The scope of consumer debt is much wider. People may take on consumer debt to acquire basics like food and clothing, as well as to pay bills, but they also take on debt to get an education, buy a home or vehicle, buy a gift for someone or acquire something they want but can't immediately fund.
Credit
Both commercial and consumer debt rely on good credit. To get credit for a business and take on debt, business owners usually show the lender how long they've been in business. They also show the lender the size of operations, the assets the business has and the products produced. The lender looks at these factors, as well as the economic stability of the region, to assess whether the business will be able to repay the debt.
With consumer debt, lenders look primarily at your credit score and your debt-to-income ratio. Employment sometimes is an issue, because your work, not sales, provides the money you'll need to pay the debt.
Legal Issues
You can run into legal trouble with both business and consumer debt, and both types of debt may require filing bankruptcy. However, failure to pay business debt usually translates into the restructuring of the business' management, liquidation of business assets or, in the worst-case scenario, the failure of the business. When creditors sue for payment of consumer debt, they usually want you to liquidate personal assets because business assets aren't available, and they may ask the court to garnish your bank accounts or wages.
Notedly, some people back unsecured business loans personally using their own credit. This blurs the line between commercial and consumer debt, as creditors may seek your personal assets if your business cannot pay the debt.
Value
Consumer and commercial debt differ in value. Because it costs so much money to start, maintain and expand a business, commercial debt sometimes can reach millions for a single business. Consumers rarely take on debt of this scope, although large-ticket items like a home easily can make personal debt reach six figures.
0 comments:
Post a Comment