A 2019 survey by the Federal Reserve estimates that about 70% of small businesses have outstanding debt. Taking on debt is a normal part of doing business, but unexpected events (like a pandemic or a recession) can make it harder to make your payments on time.
Many small business owners are currently struggling to repay their business debt. There are alternatives to defaulting on your payment. Here’s what it means to restructure your debt, and how to determine if this avenue is right for your business.
What does it mean to restructure debt?
If you’re struggling to repay a loan or a line of credit, experts at Nav, a small business financing company, say there are three things that business owners can do to improve cash flow and make it easier to make payments on time:
- Refinance: replace an existing loan with a new loan that pays off the debt of the first one.
- Consolidate: consolidate multiple debts under a single loan to make it simpler to repay your debt.
- Restructure: review your existing debt and work out more favorable repayment terms with your existing creditors.
Restructuring your debt might include asking the lender to temporarily reduce your interest rate, or working with a vendor to adjust payment dates (for instance, pushing out your payment terms from 30 days to 60 days to give you more time to earn). Restructuring typically happens in two scenarios: troubled business debt and general business debt.
[Read more: A Practical Guide to Funding Your Small Business with Business Loans and Beyond]
Troubled vs. general business debt restructuring
Some businesses restructure debt because of an event in their business life cycle, rather than out of financial need. “Businesses can restructure to prepare a company for an employee buyout, merger, sale or transfer to family members,” explains The Small Business Chronicle.
As such, there are two categories of business debt restructuring. The first is general debt restructuring, which is when the restructuring process does not incur any losses to the creditor. “This type of restructuring is able to occur when the creditor extends the loan period or lowers the interest rate—allowing the debtor to temporarily gather him or herself financially then pay their debts later,” explains one expert.
The second type is called troubled business debt restructuring. In this scenario, the creditor does lose some of the value of the original investment. Obviously, creditors like to avoid this scenario as often as possible.
[Read more: How to File for Bankruptcy]
Businesses can restructure to prepare a company for an employee buyout, merger, sale or transfer to a family member.
Stephen Bush, The Small Business Chronicle
Steps to restructuring business debt
The process for restructuring your business debt looks different depending on the situation. If it’s a general business restructure—e.g., not an emergency—you may find creditors more amenable to changing payment terms and interest rates. If you’re in a troubled business debt restructuring scenario, it may be helpful to call in an expert to help negotiate on your behalf or to consider refinancing or consolidation. In general, however, here are the steps to restructuring your business debt.
- Figure out where the problem is. Not all of your debts need to be restructured, so pinpoint the issue that’s preventing your business from performing well. Is there a loan with a high interest rate? A vendor with immediate payment deadlines? Identify where restructuring will have the highest impact. In addition, prepare to explain to the creditor why your business isn’t able to meet the existing terms of the loan.
- Calculate what you can afford. The next step is to figure out how much your company can pay toward these debts on a monthly basis. “If the percentage you can pay is 8% or more then restructuring on your own is doable. But if it’s less than 8% then you should seek professional help,” recommends one expert.
- Prepare a “hardship letter.” This is an official document that details why your company needs to restructure the debt arrangement. It will include data and financial statements to back up your case. It’s important to be open and honest when you make your request.
- Negotiate. Remember, it’s in a creditor’s best interest to work with you to come up with a better payment plan. Otherwise, they lose out on recouping their initial investment. If you’re unsure about how to negotiate with a creditor, get help from a professional debt restructuring firm that can guide you through the process.
Debt restructuring happens for businesses of all sizes—but it’s not your only option. You can always refinance, consolidate or look for a business loan from the SBA. If your business is financially sound and you’re just going through a rough patch, you can also look into opening a business line of credit. There are plenty of options out there!
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