Borrowing is a normal part of running a company. A firm that bills its clients quarterly still owes rent and payroll every month, so it will have to get a loan to cover the gap. A line of credit is the usual tool, which you can think of as providing more time between when the company is spending cash and receiving it back. Owners also take on debt to buy equipment, make an acquisition or fund a change in ownership. Debt can fuel and accelerate growth. But debt can also overwhelm and encroach on the success of a business. Without reserves to fall back on, debt can easily push a business into disaster. The pandemic made the point for many owners: when revenue stops suddenly, rent, payroll and supplies still have to be paid.
That is where restructuring comes in. In plain terms, it means renegotiating some of the terms with your creditors so they match the current state of your business. That could mean lowering the interest rate, extending the life of the loan, and/or reducing the minimum payment, for example. A borrower can also ask for more lenient repayment terms and, in some cases, for part of the debt to be written off. It’s not a bankruptcy filing or a court order; it is an agreement between you and your creditor (or creditors) to make the debt manageable. Debt restructuring typically involves changing the schedule of payments, possibly including suspending or deferring some payments. Done well, it can remove the risk of default and give a firm in distress an alternative to bankruptcy. The most immediate effect of a restructuring is that it buys you time.
It is not charity on the lender’s part. For the bank, restructuring is a way to reduce credit risk: a loan reworked so the borrower can actually pay it offers a much better chance of recovery than one that is entirely lost. This is why restructuring agreements can benefit both parties: it gives the borrower time to recover financially and get back on track, and it gives the lender an opportunity to recover the loan investment.
So who actually does the work? Most often it is your own bank. But there are outside firms too. Financial planners can work on a debt restructuring plan as well as better managing cash flow and income. Online restructuring consultants may work with your lender and creditors to develop a way out of the rut without going through bankruptcy and liquidation. Whoever helps you, the structure of your debt has to make sense to the lender. People need to lend to firms that sound like they’ll pay it back. Advisers generally say the first call should go to the lender you already have a relationship with. Only if that relationship is thin or non-existent does it make sense to start looking at other lenders.
How do you know it is time? The clearest sign is a choice no owner wants to make: whether to pay the bank or pay your vendors this month. If you are there, you are in trouble. The solution: You call your lender and have a candid discussion about the problem. You should prioritize giving the bank its due. Be up front with the problem, then find out what they can offer. Another sign is quieter. If customers are taking longer and longer to pay you, you are - deliberately or not - essentially lending your customers the cash you need to fund your operations. That can mean the business needs a bigger line of credit for working capital. Sometimes your revenue just declines. Maybe a competitor is undercutting your prices, resulting in slim margins on jobs. A drop like that is not always a reason to restructure, but it is worth watching. Expect the bank to ask the hard questions. How much money have you saved up in case your revenue drops? Can the business continue to pay its fixed operating expenses and debts? For how long?
Know what you owe. Pull out every loan and note the balance, the interest rate and the term. Short terms mean big monthly payments, and those can be deadly if the business takes a hit. This balance sheet of debt lets you start to size up what you really owe. Then be ready to explain yourself. You can’t just go to the bank and say, “I need to have my debt rearranged.” The bank would ask, “Why?” You must be able to explain your short- and long-term needs and goals. These are challenging questions, but they’ll help you present a coherent story to the bank.
The toolkit itself is fairly broad. A business can restructure with its current lender, usually by cutting its rate, extending the term to reduce its monthly payment, making the payment interest-only for a brief time, or consolidating its debts. If you can demonstrate that you can pay back a higher loan amount, you may be able to extract equity out of a loan. In addition, the lender may consider reduced or deferred amortization, a period of forbearance, or other covenant structures. None of it comes free. The lender may require personal guarantees, additional collateral, a more stringent monitoring procedure, or collateral exams.
This process can take from a few weeks to a few months and it involves an assessment of the situation, negotiation of a modification, a financial analysis and underwriting, and a closing. If the collateral is real estate, a commercial appraisal may be needed, and that alone can take four to six weeks.
The lender will examine historical and projected business performance, cash flow projections and cash burn, access to cash, servicing ability including payments to other creditors, lawsuits, deferred maintenance, distributions to owner and taxes, and industry volatility. A proven track record of navigating tough times can go a long way. If the borrower can prove that after restructuring it will be able to repay the loan, the loan officer can justify the negotiation.
Creditors Don’t Like Surprises
The last piece of advice is the simplest. Bankers say the first thing the bank wants is for the business to discuss the situation immediately rather than sneak up on the bank with a crisis. Creditors don’t like surprises so if you have a little hiccup here, tell them. Telling them early builds credibility, so be candid and tell the whole truth. They will be more understanding of small mistakes and more willing to give you a break. But the lender can never tell if things get better or worse if the lender never contacts the borrower. If the borrower calls the lender, the lender knows. Granted, it takes courage to talk to your banker when you have a problem with a loan, and owners might find it easier to lie low and hope trouble will pass, but they should avoid the temptation. Keep the paperwork the bank asks for ready. If your loan is current, the bank can often be more flexible. Trust runs both ways, and a good lender should also point out the weak spots it sees in your business.
Restructuring is a strategy that businesses large and small can use. Whatever form it takes, the aim is not to shrink your business but to make it stronger and better able to pay your debts. Adapting debt so it fits a business’s cash flow doesn’t sound very glamorous, but it is good old-fashioned common sense.
