About 70% of small businesses have debt of some kind, per a 2019 Federal Reserve survey. Debt is normal for businesses, but it’s important to stay up-to-date with repayments so you don’t get buried in too much business debt.
Then a recession or pandemic hits. Incomes fall, customers and clients start to go bust, and suddenly any existing debt is a problem. But what happens when a company cannot make their repayments on a monthly basis? Is it possible to find relief? Business debt restructuring is a way for businesses to negotiate with their lenders, so the small business can stay afloat. Debt restructuring involves changing the terms of outstanding loans to make the required repayment more manageable.
Three Scenarios Where a Company Can Take Action
Financing company Nav outlines three scenarios where a company can take action on their debt. Refinancing, when the business chooses to take out a new loan to pay off the existing one. Consolidation involves taking multiple debt, such as a business line of credit, and rolling them all into one loan that’s simpler to repay. The third is restructuring, when a business asks their creditors to change the payment terms. As opposed to refinancing or consolidating, debt restructuring involves negotiating with a company’s lenders to renegotiate the terms of the debt, often to give the small business more time.
You might ask your lender to lower your interest rate or give you more time to repay. With a supplier’s 30-day terms, ask if they can extend to 60. Either way, negotiating with lenders can take some time. When debt restructuring is being considered, a business will need to create a new repayment schedule. The process requires talking to all relevant stakeholders, including your bankers, suppliers, and anyone else involved in the business debt.
Not every restructuring signals trouble, though. The reality is that, like individuals, companies may have planned for changes in their financial position. Debt restructuring might be part of a company’s long-term strategic plan, or it might be necessary to turn the company around from financial hardship. Other times, a company may simply take advantage of the opportunity to negotiate new terms. Think of an employee buyout, the company merging with another firm, a sale, or a family handoff.
General restructuring costs the creditor nothing. The cash flows are merely changed. For example, suppose a debt has a 12% interest rate and it is due in five years. The creditor changes the terms to 8% for seven years. The cash flows change, but no loss is incurred. In a troubled restructuring, there is a loss to the creditor. In practice, that means the likelihood of getting the principal back and interest in full is much less than expected. Creditors try hard to avoid that.
Work Out the Details with Your Creditors
The process depends on your situation. With restructuring, you will have to work out the details with your creditors. In refinancing or consolidating, you will need to shop for new loans that fit your needs. Before you approach your creditors to renegotiate the terms of the debt, prepare yourself with a budget showing how much money you can afford to pay. Non-emergencies make creditors more flexible. If your financial obligations overwhelm your existing budget, you may want to consider bringing in financial experts to assist you with improving your financial state.
Your first step should be to assess your debt and decide what portion of it will need restructuring. Which loans do you need to restructure? Are there any that you absolutely can’t pay? Is the problem with the interest rates? Is the problem with the amount of the loan? Is it how long the company was given to repay? Or a vendor wanting payment immediately? If you’re having trouble making payments on your business loans, why? Is it a lack of business, an economic downturn, or another issue entirely? Understanding the cause can help you come up with solutions, like whether or not you can negotiate with your lender to find some more breathing room. Your creditors will ask the same.
Next, figure out what’s affordable. First, take the time to list all your debts and what you currently owe each creditor. Then, create a sheet listing all of the outstanding loans and the monthly repayment. From here, you need to create a chart with your outgoings and calculate how much money you can realistically pay each month. One expert’s rule: if you can pay 8% or more, you can do it on your own. If you can’t even pay 8%, get professional help.
Then write a hardship letter. A hardship letter should be written explaining why you can’t afford the debt and what you need to change so that you can. Be very honest with your creditor when writing your hardship letter. Mention that you are unable to pay your bills. Explain why this is the case. Detail what you are trying to do to change this situation. Explain what you want to do with the loan: if you have any specifics in mind, please state them. End your letter by thanking them for their understanding. You are looking for a mutually agreeable solution. Back it up with financial statements.
Once you’ve written your hardship letter, arrange a meeting with your creditor to discuss your situation. You don’t want to just walk in and ask for a loan modification. You’ll need to prepare a presentation that will go over your current situation and how your business has been affected by recent events.
Then negotiate. If there’s a problem with a debt repayment, speak with the creditor and negotiate a new deal. It’s in the creditor’s interest to give the business owner the opportunity to repay a debt in a way that works. Otherwise, their investment is at risk. Get expert advice from someone who understands your situation and can help you through it. Find a business advisor who has experience restructuring debt. Business advisors can negotiate with creditors on your behalf and help you make a solid plan.
Another Option
Restructuring is not your only option. You might consider refinancing or consolidating as an option. An SBA loan is another. Taking on a business line of credit to get cash flow is another option. A line of credit allows a business to set up an account with a lender and draw as needed. It suits healthy firms hitting snags.
Whichever route you take, it’s crucial to act before the situation gets completely out of control. If you don’t have the skills or experience to plan and execute your debt restructuring, seek professional help. If your current situation involves a lot of debt, don’t wait until the last moment to start planning.
