Should my business use debt restructuring or debt consolidation?

I wish I could say the debt on your business goes away. Wouldn’t that be cool? Of course it won’t just go away, but making a more manageable arrangement to pay the debt off should help get it under control.

Debt restructuring and debt consolidation: two different strategies for businesses drowning in debt, and people mix them up more often than you’d think. Maybe it’s that they both can make a debt easier to handle, but they’re actually very different. And they fit different situations. Here’s a quick explainer.

Every business situation is different, and I wouldn’t recommend one of these choices over the other. It’s best to ask your in-house CFO or an outside CFO consultant which way to go. I’d definitely want to lean on a trusted advisor in making that decision.

With debt restructuring, you come to terms with your creditor (or creditors) about how much of the debt you’ll repay, and modify the repayment structure. The existing contract is typically modified, and a portion of the debt is forgiven. Usually, repayment takes the form of a percentage of the total amount owed, like 60% of the total debt owed. Debt restructuring can work out if your company can make the payment and the creditor is okay with forgiving some of the debt. The above is a bit oversimplified, but that’s kind of the gist of a debt restructuring.

Restructuring is really a last ditch attempt to keep a failing company afloat. It’s usually done when a business is in dire straits. Why is the creditor willing to forgive some of the debt owed? Because collecting some money on a debt is better than likely getting less if the business goes under. If the company stays open, the creditor avoids an expensive bankruptcy.

Debt consolidation: this is a type of debt refinancing where you take several smaller loans and put them into one loan. It’s typically done for less dire situations.

With debt consolidation, high-interest small loans are traded for one low-rate loan. That means if you do debt consolidation on your business, you could save on interest every month, and have more cash to play with. Once that’s set up, you have the option of either continuing to make smaller payments each month or paying the debt down quicker, based on cash flow and goals.

When you consolidate the debt, you take on a new contract. New terms are entered into, with the same paperwork (tax returns, financial statements, sales projections) needed as for the initial loan. You can consolidate with banks, credit unions and alternative lenders, and even SBA lenders. The reason to go this route is to improve cash flow and have an easier way to repay the debt. Get a new loan, then pay off the prior loans.

On the one hand you’ve got consolidation and on the other, restructuring. They’ve got a few things in common, but differences abound. In debt restructuring the contract or agreement is modified, while with debt consolidation it is replaced. In restructuring, a percentage of the loan is forgiven by the lender, while in consolidation, the current loan is repaid in its entirety with a single loan. You’re trying to negotiate to keep the business open in a restructuring, while in debt consolidation, a goal is more cash flow.

So which should you pick?

Well, it’s not a super clear cut decision. That depends on the amount and type of debt you have, your industry, the size of your company, and revenue, among other things. Your CFO can see the whole financial picture and knows the options. They see every bill. They see every paycheck. Rely on them.

Caveats, caveats! Remember, your mileage may vary: lenders set limits on things, like time in business, and creditors may refuse restructuring if you’re not in dire straits (so it’s often best for when you’re in super deep stuff). Similarly, a consolidation lender may refuse a business that’s too new, or deny a borrower based on bad credit. Even with great credit, your total amount of loans may be too big to consolidate.

If your company is in a real pickle, trust a CFO to lead the debt management charge. No CFO? Bring in a fractional CFO, also known as a CFO consultant.

The right place to start is setting goals, then talking to your finance leaders and creditors. If your company’s losing money, these tools are band-aids that only give you more time. Without real financial guidance, at best these tactics just delay failure. A true turnaround requires a sound long-term strategy that grows sales.