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The Ultimate Guide to Small Business Debt Restructuring

Starting a business of your own is no small feat. There are a dozen logistical, personal, and financial challenges to face on a near-daily basis, and unlike wage work, there are no defined hours or real work-life boundaries. When you manage a business of your own, especially from the ground up, the days can begin to melt into each other, and the stress can take years off your life. However, it’s often well worth it when it all finally comes together.

Doing your best to run a business is one thing. But getting to that point is the tricky part. Most new businesses fail in the first five years, and an astounding 70 percent of all small businesses face outstanding debt. Still, there are countless external factors you cannot control that affect your business outcomes, from natural disasters to global economic crises, supply chain issues, personal illness, a dried-up job market, or stiff and well-financed competition.

If you are facing a large and growing debt, know that you can still turn things around. Sometimes, the best thing you can do for your business survives until the tide turns. That’s where it becomes essential to consider small business alternative debt restructuring solutions.


When to Consider Small Business Debt Restructuring

Turning a business around isn’t just an anecdotal unicorn, but a daily occurrence across the country, even if it doesn’t always make headlines. Over half of all small businesses carry debt, and many companies never truly break even. But that doesn’t mean every struggling business is destined for failure. Windfalls, financing opportunities, fresh clientele, or a lucky break are just a few of how your fortune might change for the better.

Let’s not forget that many of today’s most profitable and popular companies had fallen upon hard times not too long ago. Apple was close to shutting down in the 1990s. General Motors makes a triumphant comeback in the 2010s. Marvel Comics was an inch away from bankruptcy before the superhero movie trend saved them, turning a failing comic-book publisher into a global cultural icon. Even Starbucks bit off more than it could chew and be dangerously close to closing in the late 2000s. The list goes on and on.

Keeping your head on straight, making sure your glass is always half-full, and keeping an eye out for any opportunities for rejuvenation are vital pointers to going from treading water to commandeering a thriving crew on the high seas. Managing your growing debt and keeping your business from completely running out of money should be your top priorities.


What Are Your Options?

Let’s say you start up a restaurant with enough starting capital to put a down payment on a commercial lease, pay for the renovations, and seek out equipment loans for commercial kitchen gear. You take out another loan or a business line of credit for the ingredients and marketing costs and another loan to finance the ambiance and furnishings of the place. Now you’re saddled with multiple debts to different lenders and need as much revenue as possible to keep afloat.

If your restaurant becomes an overnight success – perhaps you serve the best food in a forty-mile radius – you may manage to continue your payments, keep your servers and cooks on payroll, keep your equipment, and stave off the potential ire of your creditors. But if things don’t ultimately work out, you will need to figure out how to maintain enough cash flow to keep paying the people who work for you while managing your debts.

So, you’ve cut costs, made the necessary short-term changes to improve efficiency, sold off unnecessary or unused assets, and prioritized your payables. Your following options are limited and include:

  • Fundraising to save your business.
  • Seeking out another loan.
  • Consolidating your debt.
  • Restructuring your debt.
  • Considering Chapter 11 bankruptcy and debt reorganization.

Let’s explore these options together.


Seeking Funding

This isn’t a viable strategy for everyone. Many entrepreneurs and small business owners use every bit of goodwill they have to convince their friends and loved ones to invest in their business. But a round of community fundraising may get you the money you need to stay afloat, significantly if you’ve fallen on hard times due to a local or recent crisis. People want to support local businesses, they want to help small businesses, and they want to see their fellow community members succeed.

The Internet is another good source of potential crowdfunding avenues. Depending on what your business offers or what unique niche you service, you might also be in luck and find a potential investor to shoulder some of the debt and help keep you on your feet – especially if your business plan is sound and your business idea is worth saving.


Exploring Financing Options

If the support of an angel investor or a community coming together to help you out is out of the question, you could consider taking on another loan to pay off your most pressing debt. However, this is rarely an option. It’s difficult for a new business to seek financing – if you’re in hot water, you’ll have an even harder time convincing a creditor to give you more cash.

Suppose you are in a position to borrow money. In that case, however, you may consider doing so if you are on the edge of losing out on critical equipment or seriously need a short-term solution to handle a much more urgent and pressing debt that could end your business.


Debt Consolidation

Debt consolidation allows you to take multiple debts from several creditors and pile them into one more considerable debt, usually with better interest rates and a more realistic payment schedule. Rather than paying a monthly installment to a different creditor each week, keeping tabs on your opportunities to negotiate with each one, and calculating all your interest rates separately, debt consolidation simplifies the matter and gives you a concrete financial goal to hit.

Debt consolidation also sees that everyone involved gets paid, so you don’t need to worry as much about impending foreclosure. If you’ve often fallen on hard times, finding a financier willing to assist in debt consolidation can be challenging. But there are a few cons. For one, debt consolidation eliminates the opportunity to negotiate with each creditor alone and perhaps even write one or two debts off with feasible one-time payments. A consolidation loan is also contingent on good credit.


Debt Restructuring

Where debt consolidation is the amalgam of all your outstanding liabilities, debt restructuring is the tactical approach of divide and conquer. A debt restructuring plan effectively tackles each debt individually, launching negotiations with different creditors to seek amicable terms, such as a lower principal, better interest rates, or temporarily reduced interest rates. Creditors want to see their money back.

They want to recoup their investment at the very least and hopefully make a sizeable return. A company that goes belly up with nothing in value to sell off during bankruptcy is not going to be getting you your money back – but a company going through rough times may pay off your debt in full if given a chance, or at least will help you minimize the loss with a little financial compromise.


Debt Reorganization and Bankruptcy

Bankruptcy is the last resort of a business about to fail. But not all companies that go bankrupt are ultimately dissolved. You can seek debt reorganization via a chapter 11 or chapter 13 bankruptcy, which allows you to devise a plan to pay a portion of what you owe, sell what you can, and keep your business running.

Your creditors usually review these bankruptcy plans before a judge signs off on them. The real reason bankruptcy is the last (and worst) form of debt relief is that while you can minimize your debt, facing a bankruptcy court is a long-term death sentence for your credit score. It can take up to seven years for your credit to recover, making it very difficult to seek funds to keep afloat.


Which Debt Restructuring Strategy Is Right for You?

Your circumstances will usually determine your best option. Outside of bankruptcy, you may consider either consolidating, restructuring, or seeking additional financing to survive the current shortage and keep fighting.


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