A rough month or two is nothing to be too worried about. If the troubles are persisting, though, and the loan payments on your business are becoming too much to manage, a loan restructuring could be in order.
The goal of restructuring is to lower the monthly payments so your business can survive its tough times. Of course, the lender has to approve it, so you have to convince them it’s a good idea.
Rework the Terms of That Loan
When you restructure a business loan, it means you and your lender rework the terms of that loan. It’s different than refinancing, where you apply for a whole new loan. Instead, a restructuring keeps the original loan but renegotiates the terms.
Your lender takes restructuring seriously. It’s not something they’ll do lightly. Often, they’ll try other remedies first for your repayment problem.
Kevin Janusz, vice president overseeing SBA lending at Beneficial State Bank, told NerdWallet in an email that requests generally come just before default or bankruptcy, as a last resort.
A lender who agrees to restructure your loan may do a few things to make paying it easier.
- Decreasing interest. The lender can reduce the interest rate on the loan.
- Extending the term. The lender can give you more time to pay back the loan.
- Forgiving part of the balance. Your lender may agree to forgive a piece of the loan’s balance.
- Selling collateral. Your lender may let you sell collateral pledged for the loan and use it to pay down the debt.
When a lender agrees to restructure a loan, it often adds “loan covenants” or new terms to the loan. In other words, be ready for new restrictions on your loan. Leslie H. Tayne, finance and debt attorney and founder of Tayne Law Group, says it’s most likely with a lender that isn’t first in line on collateral.
Loan covenants often include a “no-stacking clause,” Tayne says. It keeps you from borrowing more money that could hurt your ability to repay the lender. Consider the loan covenants as guardrails keeping the business on track. It’s a fair trade for the relief.
Here are a few other covenants that may be added:
- Lenders may limit how much money you can take from the business.
- Subordinating other creditors. A lender may require that other creditors get repaid after you repay the restructured loan.
- Payment priorities. A lender wants to get paid before another creditor when a business sells or liquidates its assets.
Lenders can also push a business into receivership. That’s when a court appoints an impartial third party to temporarily operate the business and hold its assets. The goal is to preserve the business’s value while the restructuring is negotiated. You may lose control of the business in the meantime, though.
Benefits and Costs
Restructuring your business loan has its benefits and costs, as well as things to consider, and it’s important to know them before choosing it for your situation.
Advantages of restructuring a business loan include smaller payments so the company has more cash available to operate.
Restructuring a business loan can help you avoid default or filing for bankruptcy.
The big catch is that the lender has to agree to restructure the loan. Getting one is not a done deal.
You must prove financial hardship to get a restructuring. You’ll need to show proof that your business is struggling with repayments.
Potential drawbacks of restructuring a business loan include adding a longer repayment term, which can increase the amount you pay in interest.
Taxes. Debt the lender writes off could be taxable income. Exceptions may apply.
The lender may ask for more collateral or other guarantees.
Be careful if the lender forgives any of the balance of your loan. That could be a surprise at tax time. So make sure you check your tax liability before accepting loan relief.
Approach Your Lender for Help
Contact your lender early once your trouble looks lasting, maybe as soon as you see a pattern developing, such as running short on cash month after month, or a drop in revenue or customer base.
A restructuring is a long-term fix. If you’re in a short-term cash crunch but think things will improve soon, your lender may be willing to give you some temporary relief instead. That can include suspending payments or reducing payments to just interest.
Either way, you have to make a strong case. The lender is only going to change the terms if you give them a reason to.
A common reason to restructure a loan is a risk of default or bankruptcy. Tayne says lenders may agree to adjust loan terms to recoup some of the loan’s balance if a borrower or business misses payments, rather than take the risk of default or bankruptcy, especially if the borrower still has a good chunk of the loan left to pay back.
Approval is likelier when you and the lender see a clear path to long-term recovery, says Janusz.
You might be able to recover from trouble without permanently changing your loan terms. Look at other fixes.
- Short-term lender relief: If you’ve had a hardship but expect it to pass soon, ask if the lender can offer forbearance, deferment or interest-only payments.
- Refinancing: Getting a new loan at a lower rate or longer term could let you shrink payments. This option works best if you’ve improved your credit since signing for the loan. Extending the term can cost you more in interest over time.
- Debt consolidation loan: A debt consolidation loan may be a way to combine several loans into one. A lower interest rate or extended repayment term could be available, making the new monthly payment less than you’re currently paying.
- Other solutions. You can fix operations rather than restructure the loan to help cash flow. Cut costs. Cleaning up your overhead will help cash flow. Increase sales. Growing the top line will improve cash flow.
If you’ve experienced a real hardship, there’s a chance the lender will agree to restructure your loan, and a turnaround plan helps your case.
Take advantage of your good relationship with the lender if you have one. Get in touch as soon as you see trouble, even before you miss a payment. That shows you’re proactive and accountable.
Here are the steps to approach your lender for help.
What payment plan could you realistically afford? A lower interest rate or longer term or part of the balance forgiven could all work.
Tayne says asking to repay a small amount when finances don’t justify it could doom a request.
Asking for a specific change, backed up by numbers, can get the lender on board with your turnaround plan. The lender will see that you’re committed to repaying.
Show the lender you have a recovery plan. To restructure your loan, the lender needs to be confident in your long-term ability to repay. Prepare a plan to stabilize your business and improve cash flow.
The key factor is showing the lender a plan that is realistic and detailed and backed by evidence, Tayne said. For example, you can point to any past setbacks your business survived.
Have paperwork ready. You will probably need to show recent financial statements. You likely will also need a hardship letter, which explains your hardship and when it started and how you plan to recover. Also ask your lender what it needs first.
Your lender may deny your request for a business loan restructuring. If you’re declined, Tayne advises asking why and whether there is an appeal process. Revise your plan to address each concern and reapply. Don’t give up.
About Delancey Street
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