Unfortunately, not all businesses are money-makers right from the start. Sometimes, a company will struggle to pay its debts – it’s a simple fact of life. However, the importance here is knowing when to seek help.
When the debt burden becomes too much, there are many different avenues for individuals and businesses to choose from. One of those options is called debt restructuring. Debt restructuring is when a company refinances its already existing debt to gain flexibility and create a more manageable payment cycle.
Types of Debt Restructuring
Before making any plans for debt restructuring, it’s essential to look into the different types of restructuring available. There are four main types of debt restructuring:
- Extending the repayment period
- Reducing the interest rate
- Reduction of the balance
- Changing a past-due status to current by combining the balance
The form of debt restructuring used should be dependent on the individual business’s situation. Additionally, a creditor may suggest which path to follow, depending on the level of debt.
Step 1: Determination
The first step in creating a debt restructuring plan is to assess the debt that has already accumulated. Go through each different line of credit/debt and put it into one of three categories:
- Debt that needs to be restructured
- Debt that can potentially be restructured
- Debt that cannot be restructured
Step 2: Establish a Monthly Budget
Now that the lines of credit have been neatly organized, it’s time to take a closer look at the business’ finances. Go through the companies financial statements, establish the base income per month, the minimum operating expenses, and then consider the debt. It’s essential to understand the minimum and maximum amounts a business can pay towards its debts.
Step 3: Provide Evidence
Take everything learned from steps 1 and 2 and bundle it together. Collect and organize all evidence of the company’s hardship – this will be required for creditors to take the request for debt consolidation seriously.
Depending on the creditor and the amount of debt accrued, this process may vary. Some creditors will be willing to work with the business to ensure they get as much of the investment back as possible. Others may require the company to furnish their profits or another similar deal.