Posted 29 Mar 2020, Editor's Desk
Are you worried about how to sustain your business? Learn the approach to Business Debt Restructuring
Many borrowers face serious trouble in normal debt repayments during a financial crisis which will eventually lead to increasing number and volume of non-performing loans in banks’ portfolios.
In order to deal with these issues, Business debt restructuring techniques like payment rescheduling, debt-equity swap, and write-offs to ease debtors’ debts are being looked into to help businesses survive the crisis. We get you the approach for restructuring of business loans:
The key objective of a comprehensive and timely business debt restructuring is to help get access to sufficient finance to sustain businesses
Approach to corporate debt structuring can be of many forms:
1. Debt rescheduling -
This means we restructure the existing terms of loan. It can be lengthening the time of debt repayment so that the payment amount in one installment is reduced increasing the number of payments.
2. Interest rate deduction -
The interest rate is at which a bank or a creditor lends funds. A reduction in the rate can help in reducing the amount of payment.
3. Debt-for Equity Swaps -
When a company wants to restructure its debt and equity mix to better position itself for long-term success, it may consider issuing a debt for equity or equity for debt swap. The logic behind this is an insolvent company cannot pay its debts or improve its equity standing in the market. The debt for equity swap reduces liabilities in the balance sheet and allows business lenders to have some upside in restructuring once the company returns back to normalcy.
In this approach, a partial of the loan is forgiven or written-off for financially troubled businesses. The aim is to help the company in its business debt restructuring so that it can become financially healthy and pay off the remaining loan
5. After deciding what approach to use, the next step would be to design a point of departure in while drawing a framework for corporate debt restructuring strategies. Once the crisis is over, how would the next restructuring phase be devised?
6. Focus on Policy Measures -
During an economic crisis, the Government devises reforms/moratorium initiatives that can help restore not only businesses operating in the country but the banking system as well.
When you face a business crisis, the companies affected the most should work towards business debt restructuring.
It is only wise to do so if you want to improve operations and revisit your strategies for growth. Financial challenges will be there in a business cycle, but the important part is to overcome them with a systematic and sensible approach.