Exploring Debt Restructuring Options

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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Many businesses piled up debt over the past two years, as sales shrank. If your business is finding it hard to keep up with all its credit card, credit line, and bank loan payments, it may be time to consider debt restructuring.

If you decide to hire a firm to help you restructure your debt, be sure to carefully research their background. Many fly-by-night companies spring up in bad times in this sector. Be wary of any company that won't offer you a free initial consultation, or that asks for substantial money up-front to begin working with you. Get a referral from other business owners you trust, contact your Better Business Bureau to check for complaints, or ask staff at your local Small Business Administration office for advice on reputable debt-consolidation companies in your area.

There are three possible avenues for restructuring your business debt: renegotiating with each of your existing lenders for better terms, settling existing debts, or getting a consolidation loan that pays off all your current loans. Let's look at these options one at a time.

1. Renegotiate existing loans.

This process involves someone calling each of your lenders and asking them for new deal terms. Either you'll call on lenders yourself, or hire a professional debt-help company to make the calls on behalf of the business. Before you start, consider this decision carefully, as changing loan terms can lower your credit score.

If you decide renegotiating is the best option for your business, it can be productive to approach lenders on your own first. Many lenders respond better when they hear a personal story directly from the borrower than they do when a debt company calls. If you talk with lenders yourself, be honest about your situation and tell them what you're doing to get your business finances in order…but that right now, you're unable to manage your payments and need to renegotiate.

There are several ways you could renegotiate the terms of an existing loan. For instance, you could ask to suspend payments for three to six months, with the loan to resume payments with the original terms after the grace period. Another strategy is to ask for an interest rate reduction, or for an extension of the loan term. Either of these latter two options would lower your monthly payments for the remaining time left on the loan.

2. Make a settlement offer.

In a settlement, you offer a fraction of the balance owed as payment in full. When the economy is down and they have more bad loans, banks are more open to entertaining settlement offers, as they need to get problem loans off their books. Settlement offers are more likely to be successful when it seems unlikely you will be able to pay the debt in full anytime soon.

Debt settlement has the advantage of resolving the debt entirely. On the dark side, debt settlement may affect your credit rating.

It also can have a negative tax consequence, because the difference between the full amount owed and your settlement offer is considered taxable income. Be sure to consult a tax professional about the ramifications of any settlement proposals before you finalize any deal.

3. Get a consolidation loan.

Consolidating many different debts into a single loan usually results in a lower overall payment, especially if your business's debt load includes some high interest rate charge cards. Consolidation should free up some of your cash flow to invest back into your business.

This method has the advantage of paying existing creditors off and preserving your credit rating. With fewer payments to make, there's also less chance you'll be dinged with late fees, or that a credit card will hike your interest rates because of missed or late payments.

Carefully read your current loan covenants to make sure you won't trigger any unexpected prepayment penalties if you pay off a loan early. Then approach your existing bank lenders to see if one of them might be willing to help you consolidate. They have a vested interest in seeing their own loan paid in full, so they may be a good resource. If your current banks aren't interested, you may need a debt-consolidation company's help to secure a new loan elsewhere.

Depending on how interest rates are trending, you could cut your payments substantially with a consolidation loan, but remember that fees and points on the new loan will add to your debt. You can get a sense of how much you'd save by consolidating your debts into a single, new loan with debt calculators.

This is a guest post by Carol Tice.