Business Debt Restructuring: Your Options When Payments No Longer Fit
When a fundamentally sound business is weighed down by debt it can’t service, restructuring offers a way forward. The goal is to reshape debts so payments match what the business can actually generate, while preserving the business, its jobs and as much value as possible for owners and creditors.
Key takeaways
- Restructuring changes the terms of a business's debts so the company can survive and pay what it realistically can.
- Out-of-court options (negotiation, refinancing, workouts) are faster and cheaper than bankruptcy.
- Chapter 11, including the streamlined Subchapter V for small businesses, lets a company restructure under court protection.
- Lenders and creditors respond best to a credible plan backed by solid numbers.
Restructuring at a glance
Out-of-court options
Negotiating with lenders
Lenders often prefer modifying a loan to dealing with a default. Possible changes include extending the term, a period of interest-only payments, lower interest rates, waiving covenant breaches or deferring payments.
Refinancing and consolidation
Replacing expensive short-term debt, such as merchant cash advances or high-rate credit lines, with a longer-term loan can sharply reduce monthly payments. An SBA loan can sometimes be used to refinance qualifying business debt.
Settlements with vendors and unsecured creditors
Suppliers and other unsecured creditors may accept a reduced lump sum or a payment plan, especially if the alternative is bankruptcy.
Debt-for-equity swap
A creditor or investor agrees to cancel some debt in exchange for an ownership stake. This reduces debt but dilutes existing owners.
Sale of assets or part of the business
Selling non-core assets, a division or the whole business can raise cash to pay down debt. Knowing what the business is worth is essential here. See Business Valuation Basics.
Assignment for the benefit of creditors (ABC)
An ABC is a state-law process where the business transfers its assets to a third party who sells them and distributes the proceeds to creditors. It is generally faster and less public than bankruptcy, but it ends the business in its current form.
Restructuring in court: Chapter 11 and Subchapter V
Chapter 11
Chapter 11 bankruptcy lets a business keep operating while it proposes a plan to repay creditors over time. The automatic stay stops lawsuits and collection actions while the plan is developed.
Subchapter V
Subchapter V is a faster, less expensive version of Chapter 11 for small businesses whose debts fall below a limit set by Congress (check the current limit, which has changed several times). Key features include:
- A trustee who helps the parties reach a plan, rather than taking over the business
- No creditors' committee in most cases
- Only the business owner can propose a plan, and owners can keep their equity if the plan is fair and feasible
- Plans typically run three to five years
Chapter 7 bankruptcy, by contrast, closes the business and liquidates its assets.
What lenders and creditors want to see
Whether in or out of court, a restructuring succeeds when creditors believe the new plan is realistic. Prepare:
- Current financial statements and a clear explanation of what went wrong
- A 13-week cash flow forecast and a 12- to 36-month projection
- A complete list of debts, collateral and guarantees
- A realistic plan showing what the business can pay and when
- An estimate of what creditors would receive if the business were liquidated, to show the plan is the better outcome
Signs it's time to act
Don’t wait for a default notice. Act when you see covenant breaches, maxed-out credit lines, stacked merchant cash advances, unpaid payroll taxes or a DSCR below 1.0. The earlier you start, the more options you keep.
Planning a restructuring, sale or recapitalization?
Foxboro Consulting Group prepares financial forecasts, business valuations and solvency analysis for owners, lenders and advisors.
