Borrowing money is normal in business. When it’s not managed right, debt has the power to interrupt a business’s cash flow and cause unnecessary financial stress. A debt restructuring is how a struggling borrower has the opportunity to renegotiate overdue balances, have liquidity again and continue to operate. It is a much-needed source of relief for small business owners.
Small business owners often borrow money to cover uneven cash flow. A credit line is like a loan that you can use as needed while you wait for clients to pay the invoices. Once the clients do pay, then the business pays the line down. For example, a financial planning business that bills quarterly, but has to pay its expenses monthly can use one to bridge the gap.
Other examples of where business owners borrow money include acquisitions, equipment, capital spending and ownership changes. When those loans get out of hand, that’s where a debt restructuring comes in. Small business owners use debt restructuring to improve the rates on a loan or to consolidate loans, credit lines and real estate loans.
Lori McCaffrey leads KeyBank’s Alaska market and its commercial banking sales. As McCaffrey puts it, debt restructuring is the process of a borrower asking for easier repayment terms, which can include forgiving part of the debt, on one or more outstanding loans. It’s a means of avoiding default on a loan, and it’s an alternative to bankruptcy. It’s a solution that benefits both borrower and lender.
Sheila Lomboy is a vice president who oversees a lending unit at First National Bank Alaska. What does a debt restructuring look like from the bank’s end? It is an opportunity for a borrower who has gotten behind to reset the course they’re on and can get needed breathing room. To the lender, it is an opportunity to see a lower credit risk.
Signal That Restructuring Debt May Be Necessary
You need to pay the bank before anyone else. When you find yourself in a place where you can only make the payments to the vendors and not the bank, then the red flag needs to go up. For the best results, reach out to your bank and be completely honest about what’s going on.
The first step toward restructuring your debt is to review your current debt, rates and terms. Shorter terms lead to bigger monthly payments, so ask your banker if there is a way to reduce payments or extend the term.
A lot of companies go through changes where a balance sheet calls for more capital on hand. For example, if receivable turn around times begin to stretch, the borrower may need a bigger working capital line to draw on.
Remember that it’s wise to always have a cushion of cash reserves on hand for lean times. Many small business owners who were hit by the COVID-19 pandemic saw their revenue sources dry up, though the rent, payroll and other bills kept coming. The impact of the pandemic stretched on for so long that many small business owners found it harder to maintain needed liquidity. Cash reserves are hard to keep but they’re absolutely vital.
There are some common questions a banker would ask a struggling borrower. Do you have enough cash savings to protect against revenue loss? Can you cover fixed costs and debt payments, and for how long? Ultimately, the lender is looking for a way to feel comfortable where the borrower has liquidity to not only cover fixed costs, but also the loan payments for a set amount of months.
Falling revenue can be a signal for restructuring. It won’t always be necessary. Sometimes you get into a situation where you must chase low-margin work due to competitive bidding, for instance.
In situations where the revenue falls, the best restructuring options include lowering the interest rate and elongating the maturity to create smaller payments. Refinancing a debt at a lower rate is one of the most common restructuring options you will have. Sometimes a short interest-only period can also help. A consolidation or equity extraction is only possible if you can prove repayment.
Restructuring Process
How long a debt restructuring will take depends on many factors at First National Bank Alaska, including the original collateral on the loan and the modifications being asked for. Any modification of debt must undergo the underwriting process and approvals. A commercial appraisal may be required for real estate as well. The amount of time needed for the appraisal typically ranges between four and six weeks.
It can take weeks to months to restructure debt at KeyBank. The restructuring process includes determining your need, negotiating terms, financial analysis, underwriting and closing.
No two cases are alike when it comes to restructuring debt, so terms are tailored to the situation. Options include reduced or deferred amortization, forbearance, consolidation and new covenants. The lender will sometimes seek personal guarantees.
You also might have outside experts who can help you talk to your bankers about restructuring. At The Planning Center in Anchorage, that can include asset, debt, cash flow, income, investment, estate or tax management. At Second Wind Consultants, the company says it works with major banks to help clients avoid bankruptcy.
Work Closely with Their Lender
Whatever financial issue you’re trying to resolve, the best place to start is with your current lender. If you don’t have a lot of relationship there already, you might want to consider shopping around.
Terms for a debt restructuring vary for every borrower. At First National Bank Alaska, each restructuring is designed around the specific borrower and the bank’s understanding of how they’ll be able to repay. If they can comfortably see a path to repayment, then it’s reasonable that the bank will work with them in that manner. If you’ve signed a restructuring with your lender, ask them to check in from time to time. Keep each other updated. It should be a continuous communication until the loan is repaid.
Many lenders will review the past and projected performance of a small business seeking to restructure debt as well as cash flow forecasts to gauge how quickly they burn cash. Lenders will also consider liquidity, debt service including with other creditors, lawsuits, deferred maintenance, owner distributions, taxes and industry risk.
If you have a history of coming through hard times, that will work in your favor. But the lender may still ask for guarantees, collateral or other forms of protection.
One of the biggest mistakes you can make is not to work closely with your lender. Bankers hate surprises, so if you are going to miss an obligation, do not let the bank find out about it on their own. Tell them all about your setbacks, no matter how minor. Be open with your lender. This is how you will establish credibility.
Regardless of where you find yourself, one of the smartest things you can do is create a personal relationship with your banker. That’s especially true if you are at a small community bank or credit union. It makes it easier to come to the table for a restructuring later on.
If you know you will miss a payment, contact the lender right away to manage expectations. Be prepared with documents requested. The sooner you do this, the more flexibility the lender may have while the loan is still current.
It can be tough to trust a lender, but keep in mind that the relationship works both ways. A good lender should be able to point out weak spots in your business.
Restructuring debt is a strategic option for any size of a business. When you get to the point where you need to look at restructuring options, your goal should be minimizing harm and emerging in the best position possible.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
