If your business has more debt than revenue, you suddenly find yourself unable to make your loan repayments because your cash flow has collapsed. When your company earns less than its debt payments due, it’s tough to keep up. You are far from alone, though. A 2019 survey by the Federal Reserve estimates that about 70% of small businesses carry outstanding debt. Borrowing is a normal part of doing business; the trouble comes when something unexpected, like a pandemic or a recession, makes the payments harder to meet on time. But when those companies can’t make their loan repayments, what can they do?
The Three Moves That Can Improve Cash Flow
You may find yourself at a loss when trying to figure out what to do. A major mistake that small business owners make is to think they have no options when they cannot pay their loans on time. However, there are options! You can refinance your debt, you can consolidate it, and you can restructure it. According to Nav, a small business financing company, those are the three moves that can improve cash flow and make it easier to pay on time. Let’s break down what these terms mean and how you can use them.
Refinancing is when a business takes out a new loan to pay off the first one. If the new loan is a better deal for you, it can help you stay current. To consolidate is to combine all of your existing loans into a new single loan. The advantage of consolidating your debt is that you get it under one loan. This saves you time on making separate payments to multiple creditors and also saves you a lot of effort in tracking your different balances and interest rates.
To restructure is to renegotiate the terms of an existing loan. That is different from the other two, because you stay with the creditors you already have. In practice it could mean asking your lenders to reduce your interest rate for a while, or working with a vendor to push your payment terms from 30 days out to 60, which gives you more time to earn the money. It’s always a good idea to try talking to a creditor and being very clear about your circumstances if you are unable to make payments on time. They have no way of knowing your current situation without you telling them. Sometimes you will find that they will be more willing to renegotiate and lower interest rates in order to not risk getting nothing back.
Not every restructuring starts with a crisis. Some businesses restructure in anticipation of a big company change, such as a merger, buyout, sale, or transfer to family members. So there are two categories. The first is general debt restructuring, where the creditor takes no loss. You don’t wait for a crisis to come around; you take control and talk to your bank, credit union, or other lender about changing your terms to improve your deal. You might get a lower interest rate or a longer term. In effect, the lender agrees to reorganize an existing loan or multiple loans on behalf of the borrower so that they can get more time. The second is troubled debt restructuring. Your business has to renegotiate your loans in order to stay afloat. Here the creditor does lose some of the value of its original investment; in some cases, the creditor may not even be able to recover the principal amount of its investment. Creditors try to avoid that outcome whenever they can.
The steps look a little different depending on which situation you are in. In a general restructuring, creditors tend to be more open to changing payment terms and interest rates. In a troubled one, it might be smart to enlist outside help. An expert can negotiate on your behalf, and refinancing or consolidation may deserve a second look. Either way, the first step is to clearly identify the nature and extent of the problem that the restructuring will address. Not every debt needs to be restructured, but the first thing you need to do is take stock of all of your debts. Create a simple spreadsheet of these debts. Include the company you owe the money to, the total debt amount, and/or the monthly payments. Is one loan coming due very soon or another one with a significantly higher interest rate? Put your effort where it will make the biggest difference. Be ready to tell each creditor why your business can’t meet the existing terms: Did something throw a wrench into your cash flow that left you unable to make all your loan payments on time?
Next, make an honest assessment of what your business can and can’t afford to pay. Work out how much your company can put toward these debts each month. One expert’s rule of thumb is that if the percentage you can pay is 8% or more, restructuring on your own is doable; if it’s below 8%, you should get professional help. Some firms specialize in debt restructuring on behalf of businesses, which can help you negotiate with creditors.
Then prepare a hardship letter, a document addressed to your creditors outlining your financial situation. Tell the story behind why you aren’t able to pay the loan on time. It is an official document, so back it up with data and financial statements. In your letter, tell the creditor what is going on and why you can’t make the payments under the original terms. Be honest and clear about what happened. Be prepared to share backup documents. It helps to put yourself in the shoes of the other party. What kind of information would you like to receive if you were on the other side of this transaction? Having a written request gives the other side something to hold on to.
Finally, negotiate. It is in the creditor’s interest to work out a better payment plan with you, because they don’t want to lose all of their investment. Otherwise, they get nothing. Make it a win-win. Being honest about your cash flow will make creditors more likely to work with you. To secure these concessions, you need to be prepared.
Not Your Only Option
If your business’s cash flow is on the fritz and your debts seem impossible to pay, remember that restructuring happens to businesses of all sizes, and it is not your only option. You can still refinance or consolidate, or look for a business loan from the SBA. If the business is financially sound and just going through a rough patch, a business line of credit is another possibility. If you need help, you can always hire an expert to negotiate on your behalf. Many owners panic when things don’t go as planned. Try to stay calm and break the problem down into manageable steps. Being clear about what is happening with your business and taking action helps secure the best possible outcome.
