The year 2020 has been a challenging one for most businesses. Whether you saw your cash cut to a fraction or chose to invest incoming revenue back into the business, you may now wonder what to do about the money owed. Debt repayment can cripple even healthy businesses, especially when cash flow is low. Business debt consolidation is a standard solution, but debt restructuring can sometimes offer better terms and more flexibility.
Consolidating business debts can lead to lower interest rates and making just one payment each month. Consolidated loans also tend to extend the deadline on loans, which can further help to reduce payments.
These lower payments make it easier for businesses to free up monthly cash for other critical business areas. These may include the following:
- Expanding business operations
- Purchasing new equipment
- Increasing business locations
- Pursuing a merger or acquisitions
When to Pursue Restructuring Instead of Consolidation
Money always has a cost. When money is already in the bank account, how it’s spent creates an opportunity cost of all the other ways it could have been invested. When you borrow the money, the cost is the interest.
While stretching out payments over a more extended period at lower interest rates may seem like the frugal thing to do, this is only true in the short term. In the long run, interest compounds can lead to you paying back much more than you borrowed.
Experian estimates that business loan interest from traditional banks ranges from 2% to 13%. If you borrow $500,000 over five years with a mid-range interest rate of 6%, you pay back $579,984 by the end. Would you prefer to invest almost $80,000 in other ways than paying to borrow money? That depends on the specifics of your business debt situation.
Common Business Debt Restructuring Alternatives
If you decide business debt consolidation doesn’t suit your business goals or management style, you may find restructuring more appealing. This solution helps companies improve liquidity by establishing a fair debt repayment to creditors. The wealth of restructuring options is the first big perk, but the specific path you take decides the benefits.
If your business and personal credit histories are still in good standing, you can pursue a loan refinance. This may help you lengthen the payment time allowed and reduce the interest due. Pay close attention to market conditions to determine if this will serve your purposes. This is very similar to debt consolidation but without combining the payments into one. If you find you cannot qualify for a fair debt consolidation offer, refinancing as many loans as possible may be a great alternative.
One way businesses restructure debt is to change that debt into equity. This provides the creditor with a stake in the business in exchange for writing off the debt. Equity most often comes in the form of assets or stock. While debt-for-equity swap is most common during bankruptcy proceedings, many companies use it to avoid bankruptcy. When companies recover financially, they may attempt to buy back some of this equity.
Creditors ultimately prefer some repayment of debt to no repayment at all. If you can make a solid case, you may successfully convince some creditors to reduce the final amount due. From there, you may either offer a lump sum payment or offer to make payments for a specific period of time. Sometimes, returning assets may be part of your debt settlement agreement. For instance, if you purchased equipment but find that operations have not expanded as planned, you might consider returning them.
Business mergers more often occur after a restructuring instead of the tool that creates restructuring. Even so, many business owners merge with creditors, partners, or even competitors to refinance debt. When companies merge, they share both debts and assets. Using pooled resources, the new company may have greater access to other restructuring efforts. In some cases, the assets from one may be enough to repay the debts from the other. Consider this option carefully because roughly 83% of mergers fail.
Choosing the Right Financial Partner
Whether you decide to consolidate your debt or choose a more creative restructuring option, you need the right financial partner. As with any business decision you’ve taken, don’t venture into a new path without researching the financial firm you’ve selected. Research each firm’s track record and ask follow-up questions. After narrowing down your list of potential partners, pick a financial partner that fits your needs. Also, keep in mind that creating a strong personal relationship with the financial partner you’ll be working with can be paramount and a key to a successful partnership.
At LQD Business Finance we help businesses review their finances in order to make the best decision to either consolidate or refinance their debt with an accelerated process that produces customized results. LQD Business Finance’s proprietary technology automates the entire process for a faster and more accurate underwriting offering. Streamlining the entire process, LQD Business Finance offers the EZ CASH Flow Tool to map cash inflows and outflows. Apply for a refinance or consolidation loan with LQD Business Finance.