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How To Finance A Debt Restructuring Turnaround Plan

How To Finance A Debt Restructuring Turnaround Plan

Assess The Business’s Position

The first step is to thoroughly assess the business’s financial position. This includes reviewing the capital structure, assets, revenue streams, expenses, debts, and obligations. The goal is to understand what specific issues need restructuring and why the business got into financial distress in the first place. Common reasons include overexpansion, loss of a major customer, disruption from new competitors, or poor management decisions.

Analyze recent and projected cash flows to estimate funds available for debt payments. Review contracts and loan agreements to determine flexibility for altering terms. Identify core profitable business activities to focus the restructuring around. And assess management capability to both operate under distress and lead an effective turnaround.

This assessment provides the facts needed to determine realistic restructuring options and funding requirements. It also builds credibility with potential financiers by demonstrating an understanding of the underlying business issues.

Consider Informal Restructuring First

Before seeking outside funding, explore options for informal debt restructuring with existing creditors. This could involve negotiation of extended payment terms, lower interest rates, reduced principal amounts owed, or refinancing. Trade creditors may accept partial payment or company stock in return for reduced balances owed.

The advantage here is speed and low cost compared to formal restructuring. Bank lenders in particular prefer to sustain customer relationships rather than force default. And informal agreements avoid expensive legal proceedings associated with formal restructuring.

If existing creditors show flexibility, even minor concessions can provide breathing room for the business to stabilize itself. But informal restructuring has limits, so more complex cases require funding for formal approaches.

Seek Investor Funding

Equity funding from new or existing investors is one option for financing a formal debt restructuring plan. Investors may exchange debt reduction or elimination for partial company ownership. They also may inject new capital to fund business operations during the restructuring process.

Investors will want significant management influence or control, however. They also will require a credible business turnaround plan with strong leadership to execute it. So owners must be willing to yield some power in exchange for the funding needed to restructure.

Venture firms and private equity groups specialize in funding turnarounds of distressed companies. They have experts on staff to lead rapid operational restructuring along with the debt plan. So they may be preferable to individual angel investors for complex, high-risk restructuring cases.

Consider Specialty Lending Sources

Debtor-in-possession (DIP) financing is a specialty lending product designed specifically for funding formal debt restructurings. With DIP loans, creditors agree to suspend legal collection actions while the distressed company operates under bankruptcy court protection to complete the restructuring process.

Obtaining DIP financing requires filing a formal bankruptcy petition under Chapter 11 or Chapter 15. The company can then request court authority to take out new secured loans to fund daily working capital needs. Without this specialized financing, many companies could not afford to continue operating during the Chapter 11 reorganization.

The court supervises use of DIP loan proceeds to ensure they apply only to ordinary-course business expenses. Interest rates tend to be high given the risk level, and lenders secure the loans with top priority claims on company assets. But this specialized funding enables critical breathing room to restructure complex debt loads under court protection.

Consider Government Programs

Government small business financing programs do not specifically target distressed companies. But some loan and grant funds may be accessible for restructuring-related purposes in certain situations.

For example, state governments sponsor collateral support programs allowing lenders to finance high-risk companies at lower interest rates. The programs give lenders access to cash collateral held by the state to cover potential losses. This reduces lender risk, enabling loans for companies considered less-than-creditworthy.

The U.S. Small Business Administration does not offer direct financing for existing debt restructuring. But SBA 7(a) loans can fund growth needs if the distressed company shows credible ability to repay. And SBA 504 loans can refinance certain fixed assets to raise working capital for operations.

So while not ideal funding sources in themselves, government programs may help fill gaps in cases needing multiple financing elements to enable successful restructurings.

Seek Customer Financing

An outside-the-box idea for financing a B2B company’s debt restructuring is seeking direct funding from key customers. Offering exclusive price discounts, priority product access, or even a small ownership stake could incentivize customers to inject capital. This aligns their interests with the company’s survival.

This approach works best for businesses with concentrated customer bases versus mass consumer markets. Think specialized manufacturers, custom software developers, research labs, and business service providers. A few major customers may be motivated to ensure the company sustains itself to continue serving their critical needs.

Customer financing negotiations require non-disclosure agreements given business sensitivities. And company owners must carefully weigh offering ownership shares versus other incentives that don’t dilute control. But keeping key customers informed and involved can both fund the restructuring and strengthen those commercial relationships.

Execute Agreements With Care

When securing financing commitments for a debt restructuring plan, scrutinize proposed terms carefully before signing agreements. Be cautious of arrangements allowing new creditors to assume company ownership or control should the restructuring fail. This avoids replacing today’s funding challenge with a new existential threat.

Also research the track records of investors and specialty financiers regarding completed restructurings. And consult legal advisors before finalizing high-risk agreements that could profoundly impact ownership control.

Funding a major debt restructuring while trying to save a distressed business is extremely challenging. But taking proactive steps to secure the right financing partnerships aligned with the company’s interests can set the stage for a successful turnaround. Approach potential funding sources creatively and negotiate win-win arrangements positioning the business for a brighter future.

Resources

Reddit Discussion on Causes of Business Distress – link

Article on Assessing Business Viability – link

Video Explaining Informal Debt Restructuring – link

Quora Post on Informal vs Formal Restructuring – link

Lawinfo Article on Equity Investment for Restructuring – link

Avvo Post on Types of Investors for Distressed Companies – link

Overview of Debtor-in-Possession Financing – link

Video on Debtor-in-Possession Chapter 11 Bankruptcy Loans – link

Article on Obtaining DIP Financing – link

SBA Article on State Collateral Support Programs – link

Overview of SBA Loan Options – link

HBR Article on Customer Financing – link

Example of Customer Financing for Restructuring – link

Quora Post on Ownership Loss Risks – link

Overview of Ownership and Control Issues – link

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