Debt Restructuring: Strategies and Options: Securing a win/win for lenders and borrowers.

• Author: Barbour, Tracy
• Position: FINANCE

A normal part of operating a business is taking on debt, but if that debt is not effectively managed, it can cause cash flow crunches, financial distress, and many other problems. Fortunately, borrowers can use debt restructuring to renegotiate their delinquent financial obligations, so they can restore liquidity and continue their operations.

Companies utilize debt for various reasons, depending on their unique needs. Small businesses often take on debt for the purpose of cash flow leveling, according to Michael Branham, a partner and senior financial planner with The Planning Center in Anchorage. "For example, for companies with the uneven realization of revenue (like a financial planning firm that might bill quarterly), but that still have to meet regular monthly expense needs, a line of credit can be a useful tool to fund expenses in an interim period until revenue or accounts receivable are realized," he explains.

Branham also sees small businesses assume debt for acquisitions, capital investments or equipment purchases, or funding a business succession or ownership change. Small business owners also typically restructure debt to improve interest rates, and some small businesses opt to consolidate multiple types of debt--capital loans, lines of credit, and possibly real estate loans--to ensure they can pay their existing financial obligations.

Companies that are restructuring debt can seek lenient repayment terms and even ask to be allowed to write off some portions of their debt. "Debt restructuring can eliminate the risk of defaulting," says Lori McCaffrey, Alaska market president and commercial banking sales leader at KeyBank, "as well as providing an alternative to bankruptcy when a borrower is experiencing financial distress. It can benefit both the borrower and lender."

Sheila Lomboy, vice president and lending unit manager at First National Bank Alaska (FNBA), expressed similar thoughts on the rationale for debt restructuring. "The end goal for the borrower is to allow some breathing space, a chance to reset or refocus, by changing the direction of how they got there in the first place," Lomboy says. "For the lender, restructuring debt is a way to reduce the credit risk."

When to Consider Restructuring Debt

Determining exactly when to restructure debt will depend on the borrower's situation. However, early detection is critical. "It's easier to approach a bank when you have historically paid the loan as agreed," Lomboy says.

Paying the bank first is key. "If you have to...