Business Debt Restructuring (how to consolidate OR eliminate business debt)

Chances are that if you are reading this, you have found yourself in the undesirable position of having to figure out how to get your small business out from under a pile of business debt. If you’re like many business owners, you may have even found that this debt is personally guaranteed and that means the bank (or other lender) could come after your home. If running a business hasn’t kept you up at night, this will!

Fortunately, you are not the first small business owner to find yourself in this position and there are typically debt restructuring options to get out of it.

Business debt restructuring

Three ways to restructure OR eliminate business debt (debt relief options)

Although it may not seem like it, and your bank will certainly never tell you that this is the case. It is a fact of business that there are ways to renegotiate or eliminate outstanding debt. Irregardless if your debt is to a supplier, a landlord or a lender, there are still ways to find more favorable payment terms or remove the outstanding debt entirely through one of a handful of debt restructuring processes.

You may be asking yourself “Why would there ever be a way for me to remove my business debt.” Well, you aren’t the first person to find yourself in this situation and the business people who have been down these roads have carved a few paths that you can follow.

StrategyBest For
Consolidate Debt
  • Small businesses (under $5mm revenue)
  • Multiple small, high interest rate creditors
Renegotiate Debt
  • Creditors are individuals or companies (unlikely to work with commercial lenders)
Remove Debt
  • Business does not hold a lot of assets (equipment, real estate, etc.)
  • Business is borderline insolvent or close to bankruptcy.

1. Business debt consolidation

While business debt restructuring or consolidation is one of the concerns that business owners approach us most often with, it is rarely what we advise. It isn’t that we have any problem with debt restructuring, it’s because we think there are typically more favorable ways of eliminating the business debt without cheating anybody.

With that said, business debt consolidation could very well be a fit for your company if you are still thriving while paying back several lenders. If you are in no way struggling to service your business debt, but you still want to consolidate several creditors into one payment, go for it.

You may be able to forego the business debt consolidation process by just paying down the creditors one at a time. However, if you have several hundred thousands in outstanding debt, it may make sense to consolidate the loan into one lower interest rate financing solution to free up cash flow. If you work with a business bank or merchant bank, they may have an option for you to do this.

Related

If you’re more interested in hiring a consultant to help you grow your business out from the debt that it’s in. Have a look at our article on turnaround consultants.

2. Debt restructuring and renegotiating

One of our most common recommendations to business owners as well as typically being one of our first steps when we invest capital in or acquire a new business is to restructure all of the outstanding loans. If the business is distressed owes payment to previous landlords, suppliers and other creditors, we’ll typically try to get those folks paid every dime that they loaned the company. However, the point of business debt restructuring is to get the business in a healthier position and free up cash flow, so it typically takes longer to pay these creditors back.

If you own a company that would be profitable and cash flow to the tune of at least $20k/mo. if not for the several existing debt payments that you are making each month, debt restructuring is likely a fit for you and will likely help you free up cash to make your business several times more profitable than it is today. This is not to say that smaller businesses won’t be able to take advantage of a restructuring proposal, they just typically have less leverage to negotiate with. 

To restructure your existing debt payments you may want to try getting in touch with a person at the company you are paying (bank, property owner, supplier, or other creditors) and make a personal connection. If you are able to make a personal connection, lay your cards on the table and make a proposal to significantly increase the amount of time that you are currently scheduled to make payments on. This likely won’t be received well, so be sure that you are able to articulate how you will pay the outstanding debt back and why they are better off negotiating with you than seizing your collateral. Typically, lenders don’t want to foreclose as it is a costly process. Help them see that a lower monthly payment is in their best interest.

If you already have a fractured relationship with your bank, it may be difficult to restructure your existing debt. In these cases, we recommend that you reach out to us. Often times, when we make the phone call as a potential investor in the business, the lender realizes that if they play ball, they may get much more of the loan paid back than if we weren’t part of the situation at all. In essence, we have the ability to start with a clean sheet of paper and renegotiate the business debt from scratch. Ideally this comes to a settlement that works for all parties.

business financing meeting

3. Entirely remove corporate debt

Our most common business debt restructuring practices is a business reorganization. We use a unique process that is completely legal and above board. In addition, we are able to avoid going through the courts, so the whole process of getting the company out of debt takes less than a month. Getting you off the hook for your personal guarantee on the loans may take another few weeks, but is typically doable as well.

One of the caveats of the debt restructuring process that we use means that you can no longer own ANY of your business. you will need to sell the company for it’s net asset value (liquidation value – liabilities and debt).this transaction needs to be “arms length” which means that you can’t have any future profit interest in the business UNTIL, the debt is removed.

Typically, we buy the company from you through an administration process, refer you to a consultant that we work with whos team specializes in removing the debt both from the business and removing your personal guarantee. Once the debt has been completely removed, we can then sell you all or some of your company back.

Of course, if you just avoided bankruptcy by finding us, you likely can’t buy the business back. Don’t worry, we typically will structure a deal with you so that you can earn ownership back in the company and buy us out over a number of years.

Discuss your situation with us

We are open to having discussions with business owners doing over $5mm in revenue on  how we can potentially work together to get their business out from the situation they find themselves in.

Sometimes it makes sense for us to work together, sometimes it isn’t a fit and we’ll refer you out do a consultant that is better suited for your business.

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How to avoid personal bankruptcy during a debt restructuring process

Many business loans require personal guarantees. We believe that the way lenders treat their clients is a travesty, is a burden to entrepreneurship and is harmful to the growth of our economy. However, we don’t make the rules around how your company credit works or how your loans are secured.

Virtually all bank loans require the business owner(s) to have personal recourse, substantial assets as collateral and an above average credit score. This means that not only can they take all of your business equipment if you aren’t able to pay them, they can also come for your personal assets and do significant damage to your business credit and personal credit score if you’re unable to pay them back.

corporate loan negotiation and restructing

Relief from personal bankruptcy

It is important to understand how business loans are secured and what all of the terms of the lending contract are as well as what caveats come into affect throughout a debt restructuring process. For instance, often-times it is only the primary lender that has claim against the business, all of the secondary creditors are typically subordinated to this lender. This senior lender will file a UCC form 1 and have claim over all of the businesses assets and likely your personal assets.

One of the most common business loan types is the SBA loan. The SBA will extend credit to US based business owners to buy assets for their business or even to buy a business. Fortunately, the SBA accepts renegotiations through what they call an “offer in compromise” in order to give you as the business owner, some debt relief.

If your offer in compromise is accepted, you’ll be off the hook for the time being and your personal assets won’t be seized.

While the SBA has a streamlined process of accepting these letters, understand that the majority of creditors do not have a process in place and each loan or credit agreement will need to be negotiated individually, no matter how small.

Related

For more information on how to avoid personal bankruptcy and keeping your personal assets safe, have a look at our article on personal liability.

Financing your business without personal liability and personal debt restructuring

If you are just looking into starting a business or are interested in starting a new business. First, you should make sure to get into business in an industry that you understand. Second, if you are adverse to taking on debt for your business, you should look into the several industries where you can start a business with only a few thousand dollars. These may be good industries for you to get started in.