31 Jul Will Restructuring or Refinancing My Loan Benefit My Business?
Juggling debt obligations is overwhelming when your business is facing financial pressure. Lenders design loan restructuring and loan refinancing to ease your debt burden through two very different solutions. They aren’t interchangeable. Which option makes the most sense?
To make the right loan choice, understand how each works, the differences between the two, and which is best suited for your business’s needs.
What Is Loan Restructuring?
Loan restructuring modifies your existing loan terms with your current lender to manage your current debt more realistically based on your business’s financial health. You work with your lender to renegotiate aspects of the current agreement, like extending the loan term, reducing the interest rate, switching from variable to fixed payments, or even temporarily pausing payments.
Let’s say you’re running a restaurant and took out a loan to upgrade your kitchen equipment. Due to recent staffing shortages and rising food costs, your revenue has dipped, and you’re struggling to meet your monthly payment. Instead of missing payments and damaging your credit, you contact your lender to restructure. They agree to extend your repayment period by two years and lower your monthly expenses, giving you breathing room to recover.
What Is Loan Refinancing?
Refinancing replaces your existing loan with a new one, usually with a new lender. You pay off the old loan with the new one, ideally locking in a lower interest rate, a more favorable payment structure, or a longer repayment period.
Imagine you have three small business loans with different interest rates and monthly payments. Managing all the deadlines and payment amounts is stressful and inefficient, even if you can afford it. You simplify repayment and reduce your overall interest expense by refinancing your debt into a single, larger loan, making it easier to budget and operate.
Key Differences Between Restructuring and Refinancing
While both strategies aim to ease debt, compare loan restructuring and refinancing to understand the key differences between the two options.
The Lender
During loan restructuring, you keep the same lender and the same loan. Your lender will adjust the terms to meet your current financial needs.
With refinancing, you secure a new loan to pay off your previous loan. This can be with the same lender, but switching to a lender familiar with alternative debt refinancing is more common.
Useful Circumstances
Restructuring is particularly useful when your financial problems are temporary, but immediate relief is critical to staying in business. Maybe sales have dropped unexpectedly, cash flow is inconsistent, or business hasn’t grown as you expected, and you are struggling to meet the terms of your current loan.
You typically use loan refinancing to improve the financial health of your business, not because you’re in trouble. You want to improve your cash flow, secure better loan terms, or consolidate multiple loans. Refinancing is available to businesses with stable or improving credit profiles.
The Costs
Lenders would rather restructure your loan than default, so they will renegotiate terms with you for free. They may report your account as modified to credit bureaus, which signals financial distress and impacts your credit score.
Refinancing is less likely to harm your credit and may even improve your score. However, you may pay fees to refinance. Watch for prepayment penalties on your current loan and origination costs or underwriting charges associated with a new loan.
The Strategy’s Goal
Restructuring aims to avoid default and help you manage your current debt more realistically based on your business’s financial health. It changes the terms to help you catch up or reduce your immediate payment burden.
Loan refinancing is a strategic way to cut costs or improve financial flexibility. It capitalizes on beneficial changes, such as a business gaining momentum, a rising credit score, or lower interest rates.
When Loan Restructuring Makes Sense
During the COVID-19 pandemic, the lockdowns and changes in health requirements caused significant revenue shortfalls for small businesses. Restructuring made sense to help enterprises avoid default, legal action, or asset seizure during the economic instability. Lenders were often willing to look for realistic solutions in everyone’s best interests.
Restructuring can be your business’s lifeline when you’re in a tight spot. If you’re consistently behind on payments or experiencing a major revenue decline, supply chain issues, or temporary market downturns, it’s a smart move to open a conversation with your lender. You show you’re serious about repaying the debt by taking the initiative to restructure.
When Refinancing is Better
Suppose you took a high-interest, short-term loan a year ago to cover a raw materials purchase for your manufacturing company. Over that year, you maintained a consistent customer base, solid order book, and growing revenues. That improved your credit profile. Refinancing could secure a loan at a lower interest rate with a longer term that improves your margins and frees up cash for growth.
Another time when refinancing is better is if your original business loan has restrictive covenants or prepayment penalties. Say your pharmaceutical company is generating greater revenue than you originally predicted, but the terms of your current loans prevent your shareholders from benefiting from the recent growth. Or maybe you will pay significant penalties if you pay more than the repayment amount. Refinancing to a loan with better terms can give you the flexibility to capitalize on your success.
Decide and Take Action
Whether you restructure or refinance, the most important step is acting before your situation becomes unmanageable. Lenders are far more likely to work with you when you’re proactive.
Deciding between restructuring and refinancing depends on your current financial health, long-term goals, and ability to qualify. If you are facing a temporary financial crisis, restructuring may be the immediate remedy you need. Refinancing could set your business up for long-term success if you want to improve your already strong financial position.
Consult with your accountant or financial advisor to get the complete picture of your business’s standing and make your decision. Don’t be afraid to negotiate with your current lender or shop around for refinancing opportunities. Restructuring or refinancing your loan should ease your debt burden and support your business needs.