When a company has too much debt, it can be detrimental for both the owner and its employees. If a company is overburdened with debt, unsure when they will be able to pay it off, or even how they’ll make their next payment, the best solution to consider is debt restructuring. Debt restructuring allows a company with excessive debt who may or may not already be in default, to avoid the risk of bankruptcy.  But how does debt restructuring work?

Various benefits come with debt restructuring, but how it all works can be confusing for many people. When a company is most likely facing bankruptcy, it’s a loss for both the company and the creditors. When bankruptcy becomes a serious threat, creditors often prefer to alter debt terms to avoid potential bankruptcy or default. In the end, debt restructuring will be a win-win situation because lenders typically will receive more money in a debt restructure than if they had proceeded with bankruptcy. 

There are also different types of debt restructuring a company may qualify for, each with its benefits and outcomes. Companies will often seek a debt-for-equity swap. This type of debt restructuring happens when creditors negotiate to take away a portion or all of the outstanding debts in exchange for equity. This means creditors will opt for taking control of the company in trouble instead of having them go bankrupt. This is the most preferred option when debt and assets are significant and most often reserved for large, well established firms, many of which will be publicly traded.

For small businesses however, this option is not usually on the table, and therefore a typical debt restructuring transaction would more typically involve the debtor firm hiring a specialized debt restructuring firm to spearhead the effort.  In this case, the attorney-led debt restructuring firm would work with the debtor firm to analyze their current roster of existing business debts and focus on the ones causing the most financial pain.  Typically, these may include merchant cash advances (MCA’s), or other high cost financing products.  The restructuring effort is then turned to re-working the existing lender agreements with the current lender roster, so no new credit extension is required.  

The goal of this back and forth negotiation is for the current lenders and the debtor represented firm to rework the repayment schedule to include longer repayment time frames and/or reduction in interest rates charged.  In all cases, a successful debt restructuring negotiation results in the debtor firm getting the financial breathing room they need by having reduced payments over the immediate time period- which typically matches with the businesses short term revenue shortfalls perfectly.  In other words, most debt restructuring scenarios involve right-sizing the debt repayment schedule to what the new normal business revenue outlook may actually be, especially given the impact of the COVID pandemic.  At the conclusion of the debt restructuring negotiation, the current lenders will issue new debt agreements that supersede the original agreements, thus formalizing the new terms.