Debt restructuring is being increasingly employed by businesses facing financial distress and cash flow problems to restore and enhance liquidity for their operations. It is also used to renegotiate delinquent outstanding amounts to facilitate repayment.

Refinancing is the replacement of previous debt by new debt to allow relief from financial distress. Restructuring outside of courts is becoming increasingly common.

Debt restructuring will typically involve prolonging repayment timeframe and reducing the debt. This calls for plenty of negotiations with creditors, bankers, tax authorities and vendors. It is obviously a much more viable and sustainable alternative to bankruptcy.

Small business bankruptcy filings typically incur $50,000 in court and legal fees and amounts up to $100,000 are not uncommon. With such high costs, the disappointing 20% survival rate for Chapter 11 bankruptcy filings means that small businesses should seek better avenues to continue.

Here are some types of debt restructuring methods:

1. Debt for Equity Swap

In this scenario, creditors agree to take over part of the entity’s equity in exchange for cancelling part or all of the debt. This deal often happens when the debtor has run into serious financial crisis. Very often, the remaining assets and debt are so big that creditors prefer to take over the business and keep it running as a going concern. There is little to be gained by forcing bankruptcy. By acquiring equity, creditors can claim a bigger stake in the entity.

These types of swaps are also called ‘bondholder haircuts’. In finance terminology, haircut is the variation between the price attributed to the asset as loan collateral and the market value of the same asset.

2. Informal Agreements for Debt Repayments

Since this process is cheaper and faster than a court application, many defendants who are unable to pay the enforcement officer agree to enter into negotiations to repay via installments. Besides the enforcement officer, this will also require the cooperation of the creditors. The defendants must take care during negotiations to not offer more than what they can realistically deliver and they should also avoid falling behind on repayments which can break the deal and force the enforcement officer to liquidate assets that he or she has already seized.

The benefits of debt restructuring are as follows:

3. Lower Interest Rates

This is one of the primary benefits of restructuring. Heavy interest amounts can be hard on the financial health of your business. With debt restructuring, you can enjoy lower interest rates.

4. Better Repayment Terms And Conditions

Debt restructuring will typically allow lower monthly repayments and increase timeframe to settle the loan. This will free up a lot of cash and increase your working capital to allow you to expand your operations and grow further. You will now be in a much better position to settle off the loan.

5. Existing Debts Are Consolidated Into One Loan

Keeping track of loans and repaying them becomes much easier this way. If your business has several loans then keeping track of various loans and their interest rates and making different repayments can be quite stressful. You can then focus more on your core business activities rather than fretting over loans.

6. Better Finance Planning

It can be difficult to a devise financial plan for your business if you have several loans to pay off. But if they are all consolidated into one, your life becomes much easier and you can now make a better finance plan.

Here is one example from KLB Business Funding:

One manufacturing company was burdened with an aggregate $28,000 monthly repayment for various loans. Due to this, profits trickled down to only $10,000 at year-end. KLB Business Funding’s partners collaborated to refinance all outstanding loan amounts and reduce the monthly payments to only $16,000 per month. The annual profits increased by an amazing $144,000.

Get your free consultation today with KLB Business Funding:

3702 Pratt Avenue Bronx NY 10466

(347) 755-2257

info@klbbusinessfunding.com