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Understanding Debt Restructuring

Posted by Inc. Jun 24, 2015

Body_FileFail.jpgWhen loan repayments become a problem, the key is to take action before your small business faces a crisis.

 

As economic indicators continue to strengthen and access to credit eases, more small business owners are assessing their financing options. But borrowing always presents an element of risk, and it’s wise to educate yourself in advance about how to manage your debts if your small business experiences slower than projected growth, a change in cash flow patterns, or market changes that create debt repayment challenges.

 

You may already be familiar with the benefits of refinancing to obtain more advantageous credit terms. But debt restructuring is a more complex matter: rather than a means of improving terms, it is a strategy for pulling a company out of crisis. Charles Fraas, principal owner of Fraas Advisory Services, explains that there are four ways to exit from a debt crisis: you can improve your company’s performance, sell some of its assets to generate cash, secure an outside investment, or negotiate a loan restructure.

 

Identifying problems, averting crisis

“Knowing that those are the only options, the first step in figuring out how you’re going to resolve a debt problem or prepare yourself to resolve a debt problem is to understand what your business can produce and why it is not producing,” he says. The next step is to weigh your options for resolving the problem. “You either are going to have to cut expenses, somehow squeeze out profitability from some other part of your business, or grow your business. If you don’t do one of those things, you’re going to have a debt crisis on your hands.”

 

A further complication for many small business owners (particularly sole proprietors) occurs when the business loan is backed by a personal guarantee. Fraas cautions that this can make debt restructuring “a much more limited option” because the lender may prefer simply to seize the assets of the person who backed the loan. But it may still be possible to present other solutions for the lender’s consideration.

 

Contingency planning and collaboration

If you anticipate—or are already experiencing—a problem in meeting your debt repayment obligations, Fraas advises that you develop contingency plans before you address the matter with your financial institution. “Banks for the most part do not want to call a loan, do not want to have to grab the collateral. That is an expensive, messy process,” he says. “It is up to you, though, to bring in a very good plan and explain to them what the expectations are for repayment. You don’t want to ring an alarm bell until you really know what you’re going to need from the bank.”

 

It’s equally important to understand what the bank needs from you, such as a demonstration that the plan you’re presenting will generate sufficient free cash flow to allow you to meet your debt obligations. “That is the gauge of whether or not you will be able to satisfy your debts,” Fraas says. 

 

The goal is to preserve your relationship with the lender and gain an ally in bringing your company to full recovery. By presenting a practical plan and delivering on your restructured commitments, you can avert a debt crisis, and in partnership with your lenders, put your company on a path to restored stability and prospects for long-term success.

 

 

 

Bank of America, N.A. engages with Inc. to provide informational materials for your discussion or review purposes only. Inc. is a registered trademark, used pursuant to license. The third parties within articles are used under license from Inc.. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees

provide legal, accounting and tax advice.

 

Bank of America, N.A. Member FDIC.

 

©2015 Bank of America Corporation

Bizloans_Body.jpgFor small business owners, it’s essential to get input from trusted advisors to plan strategic use of lending options and promote optimal growth

 

As a small business owner, you’re constantly dealing with immediate demands and day-to-day operations that can consume all your energy and distract you from your long-term goals. Putting out all those fires, however, often causes business owners to lose track of their long-term financial position and requirements. Have you taken the steps necessary to ensure that your lending strategy and plans align with and support your performance and growth targets for the company?

 

Plotting a lending roadmap is essential not only to achieve sustained growth, but also to ensure that you can meet your short-term lending needs. “You start at where you want to end up, and then plan your steps to get to that point,” says G. Scott Haislet, a CPA and tax attorney in Lafayette, California. To do that successfully, you’ll want to enlist the assistance of trusted advisors who can offer insights, challenge and test your assumptions, and provide an independent outside perspective on the lending component of your plans for small business growth.

 

Managing costs and maximizing assets

For example, they can help you to examine your current borrowing practices in the context of your long-term objectives. Could you do a better job of separating your business and personal credit histories and establishing a stronger credit record for your small business? What market opportunities might arise that could spark a growth spurt at your company, and in that scenario, would your current lending options be able to keep pace? Even if you don’t need access to a greater amount of financing today, what can you do now so you’re ready in advance when that need arises? Working with your accountant and financial services provider can help you determine the most accurate and profitable answers to those questions.

 

Similarly, they can work with you to optimize the use of your existing credit and financing resources. For example, if you’ve been planning to take out a loan for the purchase of equipment or vehicles, they can help you calculate whether it would be more productive to finance those through leasing. That would allow you to conserve your available or prospective credit for longer-term needs.

 

Moving from transactions to trust

To get this level of input, you need to nurture relationships that are advisory in nature, not merely transactional. “Find an accountant who’s willing to take an interest in not just the numbers or tax strategies in the business,” Haislet says. “You might have a relationship with an accountant who does financial statements for you, not just tax returns. The financial statement should have some value not just because the bank needs it for a loan covenant, but also as a management tool.”

 

Building these relationships with your accountant, financial services professional, and other advisors takes time, but the return on the investment can be significant. By incorporating independent perspectives and insights into your lending and growth plans, you position your company to make the most of its opportunities for long-term profitability, growth, and sustainable success.

 



Bank of America, N.A. engages with Inc. to provide informational materials for your discussion or review purposes only. Inc. is a registered trademark, used pursuant to license. The third parties within articles are used under license from Inc.. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees

provide legal, accounting and tax advice.

 

Bank of America, N.A. Member FDIC.

 

©2015 Bank of America Corporation


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