According to a 2019 survey from the Federal Reserve, about 70% of small businesses carry some sort of debt. It’s just a part of doing business, and then a pandemic or recession hits. When economic activity tightens, the payments that were so easy for you to keep up with suddenly become burdensome.
A lot of business owners are struggling right now to make their loan repayments and are certain that the only option for them is default. That’s not true. Here’s a look at how business loan restructuring works and whether it makes sense for you.
If you’re having trouble repaying a loan or credit line, you have options. Below, experts from Nav, a financing company for small businesses, outline three of them.
Refinancing happens when a new loan is issued and the funds from the new loan are used to pay off the balance of an old loan.
Debt consolidation means combining two or more loans or lines of credit into a single loan. This makes repayment easier.
In debt restructuring you look at the debts you already have, then negotiate better repayment terms with your existing creditors.
An example of debt restructuring is asking a lender for a temporary cut in your interest rate. Or maybe a vendor agrees to extend the terms of payment from 30 to 60 days so you can make your revenue stretch.
Not all restructuring happens due to distress. Sometimes it’s part of a company’s life cycle. For example, the Small Business Chronicle says companies may restructure before an employee buyout, merger, sale or handoff to heirs.
Debt restructuring can be divided into two categories. The first is general restructuring. This means the creditor is not losing any money, but is just extending the term of the loan or lowering the interest rate so that the borrower can recover at a later time and then repay the loan.
The second category is troubled debt restructuring. This involves the creditor taking less than the original amount it lent. Lenders naturally want to avoid this.
Restructuring Your Debts
How do you go about restructuring your debts? It depends on the type of restructuring. If it’s not an emergency, creditors tend to be more willing to budge on repayment terms. If it is troubled debt, you may want to bring in a professional negotiator, or consider refinancing or consolidating, instead. Here are some general steps.
First, identify the debt that is causing you trouble. Not all debts need restructuring. You should start by looking at the ones that are hurting your bottom line the most; for instance, a high-interest loan, or one where the lender is asking you for payment at a time when you just can’t pay. Then think about how you will explain your need for restructuring.
Next, think about what you can pay each month. One professional suggested that if you could pay 8% or more, you could restructure the debt yourself. If less than 8%, consider getting professional help.
Once you know which debt you will restructure, and how much you can afford to pay, it’s time to write a hardship letter. This is a formal document explaining why you need new terms. Be upfront and honest about the reasons why, and provide proof and financial statements to back yourself up.
Fourth, negotiate. Your creditors have an incentive to work with you - otherwise, they might not get back all the money they invested with you. If you don’t know how to negotiate, find a debt restructuring firm to do it for you.
Businesses of all shapes and sizes restructure debt. You could also choose to refinance, consolidate or get an SBA loan. Just make sure to do something before you default on your payments.
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.
