If your business is facing financial difficulties and looking ahead, you are paying more out in loan repayments and outstanding debts than income coming in, corporate debt restructuring could be a financial solution to support you.
Allowing companies the opportunity to keep their business afloat, this form of debt consolidation focuses on lowering the amount a business has to pay toward the debt (it does not write the debt off completely).
This helps a business avoid formal insolvency procedures and maximise the value left in the company.
In this post, we explore debt restructuring, the process, and areas to understand before, as a business, you jump straight in.
What is corporate debt restructuring?
A process typically carried out by creditors and the company’s management, corporate debt restructuring is a way to reorganise a company’s financial obligations to help restore some liquidity into the business.
To help lower the payments, creditors may also, as part of debt restructuring, lower the interest rate attached to the debt while also increasing the repayment schedule.
This ensures debts are repaid in full and businesses receive breathing space to continue their operations.
Debt restructuring is a preferred commercial debt recovery process over bankruptcy, as bankruptcy can be an expensive route to go down and can lead to both the debtor and creditor missing out.
Check out our post on business loan settlements to find out more about alternative debt repayment solutions.
Understanding corporate debt restructuring
Businesses need sufficient cash flow with regular income to cover interest payments.
When you recognise that your business is in financial distress, it is important that you begin working on doing something about it.
Financial distress is felt hardest when a company can no longer repay its bills and debts and, in essence, owes more out than what it currently takes in.
Larger companies at risk of insolvency often use corporate debt restructuring as a means to continue their business operations with additional capital flowing back into the company.
Process of Corporate Debt Restructuring
We always recommend that if a company is experiencing financial difficulties, it speaks to its lenders and creditors as soon as possible to explain the situation and see if alternative repayment options are available.
You will then need to establish a committee, i.e., those who are the key decision-makers in the business and can negotiate on the company’s behalf.
From here, you will start the negotiation process. Working with creditors to work out reduced debt repayments, lower interest rate options, and how much repayment periods will increase by.
Negotiations can involve:
A standstill agreement – debts are frozen
A restructuring agreement – setting out a new rescheduling plan.
In some instances, debt may be forgiven or reduced in exchange for equity in the company, and the senior management team and the team responsible for the debt restructuring should consider the feasibility of handing over a share of the company.
Creditors may also take into account if a business has tangible assets and their net worth, as well as any working capital, and all of this will be discussed during the negotiation process.
These negotiations and commercial debt recovery proceedings take time, effort, and money.
Once negotiations are complete, the distressed company will agree with the creditor to
recognise its debt obligations.
New terms must be drawn up with creditors, which both parties must agree upon and sign.
These can take several months to achieve, so businesses must plan ahead and be aware of them.
Note: If the borrower breaches any of the signed agreements regarding the loan/credit, they will also cancel any rights to additional credit or funding.
The focal point should always be on ways to avoid bankruptcy.
Note: Some creditors may not be open to negotiations, and you may hit a roadblock during talks. To further avoid bankruptcy, you can utilise Chapter 11 within Bankruptcy which forces creditors to agree to the newly negotiated terms if the court deems the plan that is put forward to them to be fair.
It’s also important to note that during the debt restructuring process, a company will also not be able to pay dividends, make capital expenditures, carry out any acquisitions, or request
further borrowing.
Commercial Collection Agency
Commercial collection agencies, like Direct Route, work with businesses to collect outstanding debt and late payments, as well as with creditors and debtors, to achieve a successful collection outcome.
The good news is that creditors are in favour of debt restructures as they will often receive a better return on their investment compared to the alternative option of the debtor becoming insolvent.
Providing businesses with a range of debt collection services, the team at Direct Route works with your credit team to ensure that payments are made, cash flow is healthy, and late payments don’t negatively affect your business.
To find out more about our debt collection services contact us on 01274223190 or email ijenkinson@directroute.co.uk.