Article written by: Joseph Safina | Published by: Forbes Finance Council
As a result of the global economic downturn caused by the Covid-19 pandemic, companies big and small are facing a crisis. Low sales and revenue have caused massive layoffs and redundancies. Even large multinationals are experiencing declining profits in several sectors, such as consumer discretionary and energy. The lower economic activity is forcing companies to rethink their debt management.
If your company is in a hard-hit sector, you might be struggling to comply with your debt and interest coverage. In this context, renegotiating loan repayment with lenders can help avoid bankruptcy and redundancies. If your company is operating on debt, restructuring can also provide much-needed “breathing space” easing its burden without affecting operations.
Financial constraints should not result in insolvency or your business ceasing operations. Restructuring aims for business continuity for the mutual benefit of both parties.
However, debt restructuring is not a means to zero debt, but a change of terms to ease your company’s burden. While the debt remains intact, restructuring has numerous benefits, such as:
• IMPROVING BUSINESS CASH FLOW
Cash flow is the heart of all business operations. If your company’s revenue is on a downward spiral, you’ll likely face cash flow problems. Poor cash flow, in turn, hurts your business’ essential activities.
With restructuring, less money goes to debt repayment, correcting the cash flow problem. Having more money available to run your company makes it easier to maximize operations and generate more revenue.
• PREVENTING BANKRUPTCY
Company debts can be overwhelming. With the pandemic taking a heavy toll on businesses, even large brand names have filed for bankruptcy. Some companies are going for months with zero revenue, leaving restructuring as the main option for avoiding a complete shutdown.
If your company cannot live up to its debt agreements, restructuring will help avoid closing shop. It will allow you to pay reasonable rates while seeking a financial breakthrough.
• ALLOWING YOU TO PAY LOWER RATES
Some restructuring terms can reduce your loan repayment rates. Lower rates mean lower monthly payments and, hence, lower debt burden.
Often, lenders looking to avoid the worst possible scenario will lower companies’ interest rates. While these negotiations can be tense, many lenders are willing to renegotiate rates to see companies out of crises.
If your company is considering debt restructuring, here are four handy tips:
This should be the first step in your debt restructuring process. Figure out the debts you need to restructure. If possible, consolidate multiple debts and restructure as a single debt.
Consulting with a debt restructuring expert can help you analyze your debt situation and figure out which debts to restructure.
With the downturn of business activity, you might only be able to afford a fraction of the original debt installment. Before approaching your creditor, know how much you can pay. This is possible by completing a thorough company audit and having accurate projections.
Creating a solid budget is also important when determining how much your company has to pay on its debts. You need to know how much money your company needs to operate normally, as well as how much it needs to pay its debts. But since the pandemic is unpredictable and may take long to contain, make sure you work with reasonable figures.
Creditors may be willing to consider restructuring if there is enough proof that your company is hurting as a result of the pandemic. Write a hardship letter explaining your company’s financial challenges and noting that you are looking to restructure the debt from your original terms.
In the hardship letter, you want to convince your creditors to act in their best interest and restructure your debt. Support your hardship letter with concrete, provable figures showcasing how Covid-19 has affected your business. It is important to be honest and open about your company’s financial situation.
Negotiating with creditors on payment terms can be challenging. Most likely, your creditors have terms that might not work for your company. Take time to carefully evaluate your creditors’ terms. I’ve seen many company directors end up accepting formulas they cannot manage because they were not careful.
If your bank suggests an unfeasible repayment strategy, try to renegotiate. Their terms are not your terms. Be confident enough to argue against repayment strategies that might burden your company. Find a balance that works for both parties.
ABOUT THE AUTHOR:
Joseph Safina is CEO of Safina Capital, specializing in large-scale funding,
M&A, business development and marketing.