Borrowing money has brought a lot of advantages to businesses not only for operation expansion. Many companies have managed their cash flow, built credit history, invested in innovations, and leveraged opportunities due to their borrowings. Their debt resulted in the company’s growth as they became a tool for navigating formidable industrial challenges. However, this same debt can become a financial issue in the long run as businesses may struggle to pay for these obligations. To remedy the situation, business debt restructuring can be applied.
Business debt restructuring is a method used by companies to alleviate financial strain. This is done through negotiating new terms with the creditors which may involve lower interest rates, extended loan term periods, or reduced debt amount, all for a more feasible debt repayment. Debt restructuring may also happen in debt consolidation, conversion of debt to equity, out-of-court settlements, or pre-packaged bankruptcy.
How does business debt restructuring work? Though the restructuring process may differ depending on the company’s financial situation and the creditor’s willingness in the negotiation, here’s how it generally works.
Assess the company’s financial position specifically identifying the total debt, repayment terms, and cash flow challenges.
Of course, it is more favorable for creditors to restructure the debt than losing money in bankruptcy. So, engage the creditors in a well-prepared proposal, outlining your company’s challenges and a plan for adjusted repayment terms.
Some of these new negotiation terms may be extended repayment schedules where smaller but more manageable payments may be offered, reduced interest rates, and creditors may also agree to write off a portion of the debt.
Now the compromise must be documented to formalize the agreement and make it legally binding to all parties involved.
How can debt restructuring help your company?
Improve cash flow. Due to the reduced monthly payments or extended repayment periods, the company now can free up cash to cover operational costs, invest in growth, or build a financial buffer.
Avoid bankruptcy. Avoiding bankruptcy through debt restructuring can save a company from damaged reputation and operations. The strategy will allow the business to regain financial stability without shutting down.
Preserve business relationships. Open communication and collaboration with creditors will foster goodwill and maintain business relationships.
Retain ownership. What is good about debt restructuring is that you can address your financial issues without giving up control of your company.
What are the potential risks to consider? Yes, debt restructuring is beneficial, however, it is not free from risks. It will have a great impact on the company’s creditworthiness, making borrowing more challenging in the future. Also, if debt is converted to equity, there is the possibility of losing control of the business in the long run. Short-term costs may also be incurred during the negotiation period for professional fees and other expenses.
Is debt restructuring right for your company? Well, if you have long-term financial challenges and your business can realistically meet the restructured terms, then why not? You should also have the resources to engage financial advisors or legal experts in the process. Debt restructuring is an affordable option for giving your company a second chance to thrive. Don’t wait for the condition to worsen, seek professional help to guide you in the debt restructuring process.