Debt Restructuring vs. Debt Refinancing: What’s the Difference? | Barry Kornfeld
When your business is struggling financially, it doesn’t mean the end and you don’t have to close up shop just yet. Luckily, there are options to getting your business back up and running more efficiently, and very likely no longer being crushed by the constant difficulties of paying off existing business debt. Even more, there are ways for businesses to repay their debts while still making a profit.
To avoid bankruptcy and keep their doors open, a business will often look into debt restructuring or debt refinancing. Most of the time, they don’t truly understand the difference between them. While they are somewhat similar, depending on a business’s financial situation, one option is better than the other. Simply put, refinancing and restructuring are both processes to reorganize debt to strengthen a person or a company’s financial outlook , but they have their differences.
When it comes to debt refinancing, it’s used on a much broader basis. When a business refinances its debt, a borrower leverages a newly obtained loan which will have better terms to pay off a previous loan. For example, a business will apply for a new, cheaper loan and will then take the proceeds from the new loan to pay off the liabilities from an existing loan. Refinancing is often viewed as a more liberal choice compared to restructuring because it takes less time, is often easier to qualify for, and can have a positive impact on a credit score.
Many will choose to refinance debt to lower their interest rates, consolidate debts, or change the loan structure. For borrowers with high credit scores, this can be a great option. However, those in more dire financial situations who do not have the best credit could benefit more and have a better chance of qualifying.
If you find yourself in a position during this Coronavirus pandemic, for instance, to potentially use debt refinancing, a very popular consideration for many business owners is to consider using loan with a limited time offer by the SBA: Small Business Administration Emergency Loan at only 3.75% fixed rate for 30-years , with no monthly payments due for the first 12 months. For so many business owners with personal FICO scores above at least 601, and who have not yet applied for EIDL financing, this route will be a great option for loan amounts up to $150,000.
For businesses that are in more dire situations, debt restructuring, not debt refinancing, could be the better option for them. When referring to debt restructuring, it basically means altering an already existing contract as opposed to refinancing which starts with a new contract. For example, a borrower restructuring their debt could mean modifying the frequencies of interest payments. More often than not, debt restructuring leaves the borrower and the creditor both better off.
Instead of a business having to give up everything because they are unable to repay their debt, restructuring could save them. At the end of the day, lenders and creditors don’t want borrowers to default on their loans due to the costs of bankruptcy. Lenders are more willing to negotiate with a business that is struggling to make payments and will restructure the loan. This could mean giving an extension on payment dates or even waiving late fees.
If a business is under immense financial hardship and swimming in debt, often time debt refinancing may still not be a viable option. You really have to run the math to see. However, it should be noted that many debt restructuring success stories result in the borrowing company reducing their short term debt payment by an average of 40% — 60%. Given the myriad of choices and their inherent implementation nuances facing a business owner at this stage of their existence, it’s essential to consult a debt restructuring expert to know the best option for you and your business.
Originally published at https://barrykornfeld.net.