What is Debt Restructuring?
Debt restructuring is a type of balance sheet accounting in which a company renegotiates the terms of its outstanding debt after it has incurred financial losses. It often includes an agreement to reduce the principal amount, along with interest owed and/or other expenses associated with debt repayments.
According to Fintalent’s debt restructuring consultants, a company that cannot meet its financial obligations, may declare bankruptcy or possibly restructure its debts as a way for it to continue operating. Sometimes restructuring may include agreeing to create more favorable terms for its creditors or converting debt into equity in order to consolidate control over assets and reduce future risk.
A company that is struggling with debt obligations may choose to restructure its debt. Often, this will involve a refinancing or sale of the long-term assets that were used as collateral. Debt restructuring can also be used to alleviate problems while waiting for the cash flow situation to improve.
3 main reasons why debt restructuring should occur
1) It can reduce the amount of interest on a loan by moving it onto a larger loan than what was originally taken out and providing new collateral which could improve your credit rating.
2) It can help you to repay the loan faster altogether by allowing you to take out one large loan upfront, as opposed to paying multiple loans every month.
3) It also shows an investor of your company’s initiative and integrity, which could make investors feel more confident in lending to your company in the future.
If a company is making losses then it needs a solution for restructuring debt. Since any lender will not give money on its own, the only way for a poor business to be able to make profits again is through adjustments in working capital or other financing needs. This can be achieved by several methods which helps in reducing the debt of the company.
Debt restructuring is not just about managing stress and change, it changes your vision altogether. It is not just about dealing with creditors, in fact it should also be used to keep your business going on, whether you are buying new assets or working on improving your operations in every aspect.
Debt restructure has many practical benefits to those who avail the service by working closely with various credit consultants. We all know that in this age of information technology and social media, we are now connected to the world in so many ways, be it through mobile or wireless networking.
On one hand you can use this new technology to deal with creditors and on the other hand you can use your own background as an asset for your businesses growth. A good credit consultant is one who can connect you with the appropriate lenders and help you manage different aspects of your businesses debt. To get good advice from a credit consultant you should treat him/her as an advisor and not just a counselor.
Why Should I Restructure My Debt?
The major reason why restructuring debt should happen is that it can lead to lower interest rates and better terms of loan repayment. If your business has a significant amount of debt, you could also be facing other challenges such as restrictive covenants on lines of credit or investments based on new portfolio principles and industry focus. This can be a good time to restructure debt because it allows the company to focus on growing, rather than worrying about debt repayment and the associated payments.
What are the major benefits of restructuring debt?
The main benefit of restructuring debt is that it is one way that a business can reduce its interest costs. For example, if your interest rate on a loan is 7% and you are able to refinance at 5%, you will save approximately 1% in interest. If you renegotiate your payment terms with a lower interest rate or extend the amount of time for repayment, you could save an even greater amount of money on interest.
Restructuring debt can also help a business to grow. For example, in the case of an acquisition loan, providing additional time and funds could allow a borrower to implement its strategy in the most efficient way. This can include a restructuring of fees and interest charges and giving the loan party more time in exchange for increased funds.
A company that chooses to restructure debt will have more liquidity and funds at its disposal as well as access to capital by providing new collateral. This additional financial resources will allow them to attempt new business ventures or make more purchases from suppliers. In terms of working capital, this new capital will allow a company to meet demands and prevent cash flow issues from happening. This will ultimately result in the company being able to provide quality services and products to customers at affordable prices.
Types of Companies That Can Benefit from Debt Restructuring
There are two main types of companies that can benefit from debt restructuring—companies that are already successful, and those trying to improve their profitability. One example of an already successful business that could benefit from debt restructuring is the business owner who has been receiving positive feedback from customers due to his/her customer service. This business owner could use debt restructuring to help expand and grow.
An example of a company that is trying to improve its profitability through debt restructuring is a company that is experiencing a slowdown in business, or needs to focus on improving margins; or even a company that needs more working capital in order to invest and expand. Debt restructuring requires the business owner to have both short-term and long-term goals based on future revenue expectations.