A 2019 Federal Reserve survey estimated that about 70% of small businesses carry some kind of debt. However, that doesn’t mean that they have taken on any more debt than they can afford. Borrowing is a normal part of running a company. Debt payments become a bigger deal as cash flow tightens and you have less cushion between expenses and sales, especially during a crisis. A pandemic or a recession is exactly that kind of crisis. When things start to turn, and cash flow begins to dry up, you still need to pay the debt regardless. If debt is consuming your cash flow, it can become financially crippling.
You know the feeling. The money comes in, and before you can use it for payroll or inventory, the loan payment eats a big chunk of it up. You might worry that the end of the month will come, and you’ll still owe money. Or that you’ll get behind on bills. It’s a cycle of stress, worry, and pain. Fortunately, there are solutions to address the debt problem, even if things are tough.
Lighten That Loan Burden
Default is not your only choice. There are steps you can take to lighten that loan burden or reshape it in a way that reduces your monthly payments. According to Nav, a small business financing company, there are three of them. The first is to refinance, taking out a new loan to pay off the old one. The second is to consolidate, which means taking out a new loan to pay off multiple existing loans. That leaves you one payment to manage instead of several. The third is to restructure, which means talking to your existing lender(s) to modify the terms of your existing loan(s).
In practice, restructuring might mean asking your lender to lower your interest rate for a while, or asking a vendor to move your payment terms from 30 days to 60 days, meaning you pay them two months later instead of one. A restructuring can give you a temporary cash flow boost by extending the time frame before you have to pay. And there’s no harm in trying.
Restructuring tends to happen in one of two situations. Some businesses restructure because of an event in the company’s life cycle rather than financial need. For instance, a small business could restructure to accommodate a change of ownership. The Small Business Chronicle mentions preparing for an employee buyout, a merger, a sale or a transfer to family members. That is general debt restructuring, and the creditor loses nothing on the deal. The lender makes minor adjustments to the payment schedule to accommodate a change in the business cycle or some other part of life of the company. It extends the loan period or lowers the interest rate, which gives you more time or better terms.
But some companies have to restructure because they aren’t keeping up with payments, and they’re trying to avert default and bankruptcy. That is troubled debt restructuring, and it is probably the one you are facing. When a loan is troubled, it means the borrower isn’t paying back the loan according to the original terms of the loan agreement. In this kind of deal, the creditor must make concessions to the owner that a lender wouldn’t normally make in any other circumstances. It loses some of the value of what it lent, which is why creditors try to avoid it.
That difference shapes how you go about it. In a general restructuring, creditors are often more willing to change payment terms and interest rates, and you have the advantage of planning and negotiating with a lender. You can set up a meeting and discuss your situation, taking time to explain why you need a restructuring, what you are going through and what you would like to do. But if it is a troubled debt restructuring, you are negotiating under pressure. It may be wise to consider bringing in an expert to help you, or to look at refinancing or consolidation instead. Either way, the steps are much the same.
The first step is to determine which one of your debts is getting you into trouble. It’s likely that only a few of them are causing you trouble. Are there any debts you won’t need to worry about restructuring? If so, you should leave them alone. Review each debt. Is there a loan with a high interest rate? Is there a vendor you need to pay right now? What changes would help? Is there a lender you can contact about lowering your interest rate or extending your loan term? Write down a list. Focus your effort where restructuring will do the most good, and be ready to tell each creditor why the business can’t meet the current terms.
Next, sit down with your numbers and see how much you can realistically put toward your creditors every month. Here’s a rule of thumb: if what you can pay is 8% or more, then you can probably do the restructuring yourself. Below 8%, you probably need a professional to help you with the restructuring.
Then write a hardship letter. In short, a hardship letter explains how changing a financial arrangement (like a debt payment plan) would help your company to ease a financial hardship it’s currently facing. It should answer two questions: Why can’t the company pay the current payment? And why should the lender grant the company a new payment arrangement? Back it up with data and financial statements. It should be detailed, and it should be honest. You should avoid lengthy stories about your situation, and simply give facts on why you are no longer making your current payment.
Finally, negotiate. A creditor does not want you to fail or go out of business. If you can’t pay, it may never recover what it lent you, so keep in mind that it’s always in their best interest to have you continue to pay back the loan as long as possible. Lenders know your business is in trouble and they would rather work with you to find a solution than lose your account. So remember that you are on a solid footing when you negotiate. You need to convince your creditor that you have a viable, ongoing business and that you can continue to pay on the account. If you’re unsure how to negotiate with a creditor, or are afraid of the outcome, a professional negotiator can help. A debt restructuring firm can guide you through the process.
Restructuring is about getting some breathing room, and it is only one of several tools. You can try refinancing, consolidation, or even an SBA loan. If the business is financially sound and you’re just going through a rough patch, a business line of credit may be what your business needs. These things happen to the best of us. The key is not to rush into the first decision you come across but to carefully weigh your options before making a choice.
