Overview
What Is Debt Restructuring?
Businesses which face severe problems relating to cash flow, liquidity, financial distress undergo a process called debt restructuring to restore liquidity and gain flexibility in short term and manage the debt burden. This involves waiving some portion of liability to extending the term for repayment and discounting the redemptions.
Methods of Cash Credit
Debt equity swap
The business entities negotiate with creditors to forgo a certain part of their debt in exchange for equity shares of the company. This arrangement is favorable to the creditors when running the company to bankruptcy provides disadvantage to the creditors. Such swaps occur in large companies with large liabilities and assets.
Bond- holder haircuts
The business entities negotiate with the bond holders to waive off some fraction of their liabilities. This can be arranged by a discounted redemption, or by reduction in rates of interest.
Informal Debt Repayment agreements
This process is simpler than applying to the court. Here an informal arrangement is made between the creditors and the organization to revise the terms and conditions and even asked to write off the liability to some feasible extent.
How does Debt Restructuring Work?
Some companies seek to restructure their debt when they are facing the prospect of bankruptcy. The debt restructuring process typically involves getting lenders to agree to reduce the interest rates on loans, extend the dates when the company’s liabilities are due to be paid, or both. These steps improve the company’s chances of paying back its obligations and staying in business. Creditors understand that they would receive even less should the company be forced into bankruptcy or liquidation.
Debt restructuring can be a win-win for both sides because the business avoids bankruptcy and the lenders typically receive more than they would have through a bankruptcy proceeding.
Individuals/Firms hoping to restructure their debts can contact Fourbridges Loans to help in the negotiations.
Benefits of Debt Restructuring
The chief purpose of undertaking debt restructuring is to save and sustain the business. It offers additional benefits for businesses and also allows debt restructuring for individuals.
The benefits of debt restructuring include:
- Either through deferment, reduction in instalments, or reduction in the interest rate, debt restructuring provides you with immediate cash for investments in future business plans.
- Legal protection for the business from creditors.
- Legal protection for the assets of the firm.
- Helps keep the company running as a going concern.
- Creditors realize better recovery compared to the firm going bankrupt. In the case of individual borrowers, a debt restructuring personal loan helps creditors achieve superior outcomes.
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