Business Debt Reorganisation
Debt reorganisation is an umbrella term covering debt restructuring and debt refinancing. The two reorganisation options are very different.
Debt restructuring is a process in which a company or an individual reorganises their existing debt obligations with the aim of improving their financial position and avoiding formal insolvency.
Debt refinancing is used on a much broader basis than restructuring, in which a borrower benefits from a newly obtained loan with better terms to pay off a previous loan.
Debt restructuring may also involve consolidating multiple debts into a single loan or seeking the help of a debt management company to manage and negotiate debts on behalf of the individual or company.
The goal of debt restructuring is to avoid default or insolvency.
Types of debt restructuring
Types of debt reorganisation
Informal arrangements: This is a non-legal approach where the business and its creditors agree on a repayment plan (restructuring). This approach is typically less formal and less expensive than other options, but it may not provide the same level of legal protection.
Refinancing: This involves seeking a new, more favourable loan to repay existing debt, which involves finding new lenders.
Debentures: A debenture is a loan agreement in writing between a borrower and a lender that is registered at Companies House. It gives the lender security over the borrower’s assets. A debenture can only be taken on a limited company or limited liability partnership.There are two types: floating (group of changing assets) charge and fixed charge. A floating charge asset can be changed until they are fixed, whereas a fixed charge cannot be sold without notifying the lender. This security can lead to the lender applying for liquidation if the loan is defaulted.
Mergers & Acquisitions: When your business is struggling short-term, but has future prospects and viability, it may be worth considering a merger/acquisition by a larger company that can inject cash flow investment. This is a type of refinancing, although it is also referred to a business rescue.
Director loans to inject cash flow: Putting your own money into your business comes with risks (refinancing). But if you have faith in your business and your abilities, a director's loan to the company could help avoid a formal insolvency. It also tells others that you are prepared to take calculated risks based on a viable business. You can also be more in control of the repayments back to you, this could be invaluable.
Advantages of debt reorganisation
Advantages of debt reorganisation
Improved cash flow: Debt reorganisation can help a business manage its cash flow better by reducing its debt payments or spreading them out over a longer period of time. This can help the business to meet its obligations and reduce the risk of default.
Reduced interest rates: Debt reorganisation can involve negotiating new terms with creditors, which may include lower interest rates or longer repayment periods. This can help to reduce the cost of borrowing for the business.
Avoiding insolvency: Debt reorganisation can help a struggling business avoid insolvency or bankruptcy, which can have serious consequences for its owners and employees.
Improved credit rating: Successfully completing a debt consolidation (refinancing) can help to improve a business's credit rating. This can make it easier for the business to access credit in the future, which can be important for growth and investment.
Maintaining control: Both refinancing and restructuring business debt options have the goal of making loan repayments more manageable, in a non-invasive way. This is the best way to avoid liquidation and formal business rescue options that appoint a supervisor or administrator to take over the running of the business.
It's important to note that debt reorganisation is not always the best option for every business, and seeking professional advice is recommended if the viability of the business is in doubt.
Disadvantages of debt reorganisation
Disadvantages of debt reorganisation
While debt reorganisation can offer several benefits, there are also some potential disadvantages for businesses.
Here are some of the drawbacks to consider:
Costs: Debt reorganisation can involve extending borrowing and paying more interest back overall.
Reduced access to credit: Debt reorganisation can affect a business's ability to access credit in the future. Creditors may be more hesitant to lend to a business that has gone through a debt consolidation or restructuring process.
Limited flexibility: Debt reorganisation plans often involve strict repayment schedules and other restrictions, which can limit a business's flexibility in managing its operations. This can make it difficult for the business to respond to changing market conditions or pursue new opportunities.
Reputation: Any period of financial difficult may be identified before debt reorganisation has been sorted. This can make it more difficult for the business to maintain relationships and secure new business even when they are on a more stable footing.
Potential failure: Debt reorganisation is not a guarantee of success. If a business is unable to meet its obligations under a debt reorganisation plan, it may still face insolvency or bankruptcy. This can have serious consequences for the business and its owners.
It's important for businesses to carefully consider the potential benefits and drawbacks of debt reorganisation before pursuing this option.