According to a survey taken by the Federal Reserve in 2019, about 70% of small businesses reported having outstanding debt. Now, it’s not unusual to take on debt as a business owner, but if something unexpected like a pandemic or recession happens, it can become very difficult to make payments. Many small business owners are finding themselves in that situation right now. But it’s not all bad news. You don’t have to default on your loans.
Restructuring is one of those words that gets thrown around a lot, so it’s important to define what exactly we mean by it. Restructuring is the process of negotiating new terms with a lender in order to reduce financial pressure or keep business operations moving forward. It isn’t as scary as it sounds. It just means changing a few terms and conditions to make things easier to manage. But what if your business has stopped producing income or your revenues have significantly decreased? And now, you’re falling behind on debt repayments? In this case, restructuring is an option.
Nav, a small business financing company, says there are three ways to improve cash flow. A refinance means taking out a new loan and using that loan to pay off the old loan. Consolidation is taking several debts and rolling them into a single loan, which makes it easier to pay off. Restructuring means changing the terms and conditions with your current creditors. For example, you could ask your lender to temporarily lower the interest rate on your loan. You could ask a vendor to change your payment terms from 30 days to 60 days, so you have more time to earn.
That second example is worth exploring more. Talk to your suppliers and try to find a compromise and structure the payment terms in a way that better fits your company’s financial needs.
However, restructuring isn’t just about dealing with business struggles. Small Business Chronicle says companies restructure to prepare for an employee buyout, to merge with another company, to sell, or to transfer ownership to family members.
There are two types of restructuring. A general restructuring is when a creditor doesn’t lose anything. For example, the creditor extends the loan period or lowers the interest rate, so the debtor has more time to regroup and pay back the loan. A troubled debt restructuring is when a creditor loses some of their original investment. Creditors try really hard to avoid this. So, in a general restructuring, the creditor is usually more receptive to new terms and interest rates. But in a troubled debt restructuring, it’s important to consider seeking the help of an expert to negotiate on your behalf, or explore refinancing or consolidation. In other words, the kind of restructuring you are facing will determine how you approach the situation. If it’s a general restructuring, you may have a better shot at successfully negotiating a lower interest rate. But if it’s a troubled debt restructuring, you might want to start looking for financing that offers more favorable terms.
The Process Tends to Follow the Same Steps
The details differ from one business to the next, but the process tends to follow the same steps. First, find the problem. Start by writing down all of your business debts and payment terms. Not all of your debts require restructuring. Do you have a high interest loan? Is a vendor requiring immediate payment? Focus on the debts where you’re having a hard time keeping up with the payment schedule, since that is where restructuring will have the biggest impact. Be prepared to tell the creditor why you can’t meet the original terms of the loan. Having that clear understanding will be helpful in the next step.
Next, figure out how much you can afford to pay each month. One finance expert says if you can pay 8% or more, you can restructure your business loans yourself. If you can’t pay 8% or more, you should get help from a professional. Be realistic here. Offer to pay something you can really afford.
Then write a hardship letter. This is an official document explaining the reasons why you need to restructure your debt, backed by relevant data and financial statements. Be honest and open. You’ve got to be willing to communicate with the lender and tell them honestly what’s happening. Think of the letter as a proposal. Make sure you include your financial statements and any information that demonstrates the decline of your business. Be as specific as possible. Don’t try to cheat the system by giving them incomplete or false information. But even if you do a great job with the letter, creditors might reject it right off the bat. But don’t give up.
Finally, negotiate. Once you’ve figured out how much you can afford to pay, you need to work with the creditor to come up with a new payment plan. You can negotiate the interest rate or the payback schedule. But the worst thing you can do is to panic or get defensive. That’s counterproductive. It’s best to approach the lender as calmly and professionally as possible. It’s important to be very clear when you negotiate so there are no misunderstandings. Choose your wording carefully. If you don’t fully understand how certain terms and conditions are structured, ask.
Think about it from the lender’s side. The creditor will benefit from working with you, as they would lose their initial investment if you can’t repay the loan. Negotiating a better payment plan gives your company breathing room to get back on track. This is definitely easier said than done. If you’re unsure of where to start, seek professional assistance from a debt restructuring firm. Keep in mind that restructuring takes time and patience. You may have to wait for your creditor’s response for a while. Don’t expect your loan to be restructured overnight. But it’s certainly worth the effort.
Restructuring can be used by businesses of all sizes, but it’s not your only option: refinance, consolidate, apply for an SBA loan, or if your business is otherwise healthy and just facing a difficult situation, seek a business line of credit. Whatever route you take, be honest, be clear, and have your act together. See, it’s hard to restructure if you’re in denial. No one likes debt, but sometimes you just have to face it head-on, and that starts with honesty. In the end, the key is to come up with a plan to get through this challenge.
