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What You Need To Know Before Restructuring Business Debt

What You Need To Know Before Restructuring Business Debt

Restructuring business debt can be a complex process, but it may be necessary if your business is struggling with high debt payments. As you consider restructuring options, there are several key things you should know in order to make the best decisions for your company’s financial future.

Understand Your Current Debt Obligations

The first step is gaining a clear picture of your current debts. This includes:

• The total amounts owed
• Interest rates and payment schedules
• Any loan covenants or restrictions
• Which loans are secured and unsecured

Understanding the full landscape will allow you to determine which debts are most problematic or carry the highest interest rates. Prioritizing and targeting those debts can make restructuring more effective.

Explore Restructuring Options

There are a few main options to restructure business debt:

Debt Consolidation

This involves taking out one new loan to pay off multiple existing loans. This can potentially help secure a lower interest rate or longer repayment term. However, it also means taking on additional debt.

Corporate Debt Refinancing

Similar to debt consolidation, refinancing replaces an existing loan with a new loan under different terms. This may help improve cash flow by lowering monthly payments. But it still leaves the principal debt amount outstanding.

Debt Rescheduling

With rescheduling, the lender formally agrees to change the repayment terms – typically extending the loan term or delaying payments. This provides short-term financial relief, but overall interest paid will increase.

Debt Reduction

Also called a “haircut”, debt reduction directly lowers the total amount owed. Lenders may agree to settle debt at less than face value. Major reduction, however, usually requires demonstrating real financial distress.

Consult Professionals

Restructuring often involves legal intricacies. Consulting financial, tax and legal professionals ensures you pursue options properly aligned to your situation:

• Accountants can analyze cash flow and the viability of different plans.
• Tax advisors can highlight potential tax implications.
• Business lawyers can negotiate new terms or settlements with lenders.
• Financial advisors can model projections under different scenarios.

Their guidance is key for developing feasible strategies and documentation.

Understand The Process

While individual deals vary, some typical steps are:

1. Documenting financial hardship and inability to meet current obligations. This is crucial for justifying relief to lenders.
2. Presenting proposed restructuring terms, supported by financial statements and projections. Terms must still ensure lenders recoup their investment.
3. Negotiating with all creditors and addressing their questions or concerns until new agreements are reached.
4. Drawing up contracts for the modified payment plans and getting formal approval from company leadership.
5. Making initial payments under the new structures to demonstrate commitment.

This process involves extensive communication and negotiation. Be prepared to answer difficult questions and back up claims with evidence.

Explore Alternatives

If restructuring proves unfeasible or terms are unacceptable, alternatives such as debt equity swaps or bankruptcy may be considered instead.In a debt equity swap, creditors trade debt for ownership stakes in the company. This eliminates debt but relinquishes control.As a last resort, bankruptcy can provide court-supervised debt relief. However, it risks assets and damages business relationships.Carefully weighing all options against company goals and priorities is vital.

Know The Risks

While potentially beneficial, restructuring plans aren’t guaranteed to succeed. Even with modified terms, the business must still generate enough operating income to service debts.Other risks include:

• Higher total interest expenses over longer repayment periods
• Losing control or ownership stakes
• Damaging relationships with creditors
• Lower credit ratings hampering future financing

Maintaining open communication and upholding new agreements helps mitigate these risks.

Make Operational Changes As Well

To avoid needing repeated restructuring, leverage debt relief to implement operational changes. Examples include:

• Reducing expenses company-wide
• Increasing sales through new marketing initiatives
• Divesting underperforming business units
• Investing in technology or processes to improve productivity

With debt payments reduced, companies have some breathing room to pursue revenue growth and efficiency gains.

In Summary

• Get clarity on current debts and cash flow difficulties
• Work with professionals to identify and model restructuring options
• Initiate discussions with lenders and negotiate revised terms
• Execute new agreements and make initial payments under modified schedule
• Pair restructuring with operational changes to ensure future sustainability

With careful planning and follow-through, restructuring business debt can put struggling companies back on steadier financial footing. Consult experienced advisors like [Law Firm Name] to determine if restructuring aligns to your situation. Contact us today to arrange a free consultation.

Resources

Images

Business Debt RestructuringPhoto by Pixabay from Pexels

Videos

{%youtube z3HR7EAnefo %}2 minute video overview of business debt restructuring from CFI Education Inc.

Articles

Debt Restructuring Definition from InvestopediaBusiness Debt Consolidation from The Balance SMB