For many small business owners, debt is just part of everyday life. It is practically impossible to conduct business without taking on a least a small amount of debt, but when that debt becomes overwhelming or just too much to repay, what can businesses do? Reaching financial goals is often more attainable when able to avoid the seemingly relentless pursuit of angry creditors and debt collectors.
Restructuring debt to avoid bankruptcy is a good alternative to defaulting on payments. Generally, businesses can choose from three options to ease the burden of excessive debt: refinance, consolidate or restructure.
Similar to refinancing a mortgage loan, when refinancing business debt, a business takes a new loan to pay off the original. A variety of purposes drive the decision to refinance a loan, including a resulting lower monthly payment and/or obtaining a lower interest rate. For many businesses, refinancing can also lead to combining multiple debts into one payment, which makes it easier to meet monthly obligations.
Consolidating business debt is similar to refinancing, in that multiple debts are combined into one loan. But with consolidation, the interest rate is typically not lowered. While the amount of the monthly payments may remain the same, combining all the payments into one simplifies the repayment process.
Unlike refinancing or consolidating, restructuring business debt doesn’t require taking out another loan. Instead, businesses work with their lenders to obtain better terms on their repayment. Some lenders will negotiate settlements on debts when it becomes clear that a business may never be able to repay an obligation otherwise. This option is often favorable to bankruptcy, as it reduces costs and is less complicated.
There are two options for restructuring, depending on the amount of debt a business owes. If a business needs more time to repay the debt and the creditor will not incur any losses, it can utilize general business restructuring. Typically, the creditor will give the business an increased loan period or may lower the interest rate to give the business time to increase its financial means.
The second option is troubled business debt restructuring. In this case, a creditor will incur losses by working with a business to repay debts. Most creditors want to avoid this option, since they won’t get back the total amount, plus interest, of what they loaned the business. However, it may still be better for all involved than a bankruptcy filing.
Prepare to Restructure
If a business determines that restructuring its debt is the right move, follow these steps for the best results possible:
- Pinpoint the Troublesome Debt: There are likely one or two debts that have high interest rates or short payment deadlines that are at issue. Focusing on restructuring these troublesome debts, rather than every single debt, can help a business improve its financial outlook.
- Determine How Much Can be Paid Monthly: Before approaching a creditor to restructure a debt, a business should first determine how much it can afford to pay toward the debts.
- Write a Hardship Letter: Most creditors need this official document before they will work with a business to restructure debt. It is important to be forthright with needs and include financial information that clearly articulates the distress.
- Prepare to Negotiate: Generally, creditors want to work with businesses to restructure since it often improves the potential for eventual full payment and helps to maintain an ongoing customer relationship. However, businesses should be prepared to negotiate firmly and confidently to ensure the best terms possible.
Financing Options to Aid in Debt Repayment
Even after negotiating a repayment plan with creditors, additional help may still be required. In such cases, there are a few financing options for businesses. However, in every case, care should be taken to ensure that these sources do not add to the existing long term debt load.
- Business Lines of Credit: This revolving credit line can be borrowed against as needed, providing the option to pay off debt without taking out a loan; however, it can only be used to repay debts such as payments to vendors, not other banking or institutional loans.
- Business Credit Cards: When debts are credit card related, businesses can combine these into one card with better overall terms.
- Business Term Loans: These short- or long-term loans can provide a lump sum repayment on a plan to refinance, consolidation or restructure.
- SBA Loans: The Small Business Association’s 7(a) loan program allows small businesses to borrow up to $5.5 million, but the process can be lengthy and often requires near-perfect credit to qualify.
Businesses facing financial difficulty often need some space to breathe. When managed carefully, debt restructuring, consolidation or refinancing can get businesses back on track to meet financial goals. When faced with these decisions, be sure to work with qualified experts when considering options.