If the payments on your business loans have started to feel impossible, don’t give in to panic just yet. You aren’t the only person in the country that has ever found yourself in this situation, so don’t be too hard on yourself. But don’t think that it’s something you can ignore either. According to a 2019 survey conducted by the Federal Reserve, 70 percent of small businesses have outstanding debt. Debt is a part of life and it isn’t inherently bad. There’s no shame in being in debt, but things like a pandemic and recession can make it challenging to make your debt payments. You have options. There are alternative ways to manage your debt besides defaulting on your payments. In this post, we’ll go over what business debt restructuring means, when and why it can help and how to do it.
The Meaning of Debt Restructuring
Nav, a small business financing company, says there are three alternative strategies to improve your business cash flow: refinancing a loan (where you take out a new loan to pay off an old loan), debt consolidation (combining several existing debts into one loan, making it easier to pay back) and restructuring your debt (reviewing your existing debt and finding better repayment options with existing creditors). That last one is the subject here. The meaning of debt restructuring can be defined as the process of reviewing your current business debts and negotiating changes to those arrangements with existing lenders. It’s a case of managing the debt you already have rather than seeking new finance. In other words, you want to put some extra time or a payment plan into place that works with your budget for your current debt.
For instance, if you’re struggling to meet your financial obligations, you could ask your lender to temporarily reduce your interest rate. You can also ask your vendor to extend your payment terms from 30 to 60 days, so you have more time to earn your cash.
And restructuring your business isn’t just for an emergency. Sometimes, you might need to restructure because of life-cycle events like an employee buyout, merger, sale, or transfer to a family member (Small Business Chronicle). Broadly, there are two types of restructuring: general and troubled. General restructuring occurs when the creditor takes no loss in changing the debtor’s repayment terms. For example, a creditor may choose to extend the loan period or lower the interest rate, giving the debtor time to regroup and repay. But in troubled restructuring, the creditor loses out on a portion of the original investment. Creditors avoid this type of restructuring, if at all possible. It’s the loss that makes it a troubled restructuring.
Which kind you’re facing shapes the whole process. General restructuring (where there’s no emergency) means the creditor is more likely to be willing to renegotiate the terms or lower the interest rate. If it’s a troubled restructuring, consider hiring an expert negotiator or opt for refinancing or consolidation. Either way, the basic steps are the same.
How to Negotiate Debt Restructuring
The first step is to figure out where the problem actually is. Start by creating a list of outstanding debts. It’s not going to make sense to restructure every loan you have! Do you have a loan with a high-interest rate? Is a vendor pressuring you for the payment at an extreme cost to cash flow, that is forcing you to pay earlier than you’d like to? You have to be able to identify, not only in your head but definitely on paper, exactly which debts are holding you up. And you have to make an outline of exactly why you can’t meet those loans’ terms either.
The second step is to figure out exactly how much money you can afford to pay each month. One expert’s rule of thumb: if that figure works out to 8% or more, handle it yourself. If it’s less, go ahead and get some professional help. If you can’t afford to pay, but you say you can, it won’t work! The worst thing you can do is paint a scenario for someone else of a situation that doesn’t reflect reality. Again, this is the part where putting it on paper helps you have a clear vision of what you can and can’t do. Don’t go nuts and make promises you can’t keep.
Step three is to draft a “hardship letter.” This is an official document explaining why this is happening and what’s going on. It must include data and financial statements. But you can’t just ask the lender to reduce interest rates or increase payment terms without being upfront. The lender’s going to need details on your business’s current situation. You need to be honest about what is going on, and how you came to this situation. Creditors can be compassionate if you are honest with them.
The last step is to negotiate. Your creditors will benefit from your restructuring plan, too. Otherwise they’d lose their initial investment. Be reasonable. Try to make a solid case that everyone should win. Be empathetic, but firm. Don’t know how to negotiate debt restructuring? You might want to consider enlisting the help of a professional debt restructuring firm. A professional debt restructuring firm can give you the expertise and the guidance you’ll need to walk into that conference room with confidence.
Your Options
Remember: Restructuring debt is not the only option you have. You can refinance, consolidate or get an SBA loan. Or if you are financially sound but you’ve landed in a rough patch, consider getting a business line of credit. If you’re reading this because you’re already behind, that’s OK. Just be honest with yourself about where you are right now and what the problem areas are. You can find alternatives, you just need to see what those are first. Take the time to look at your options and figure out which one suits you best.
