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Advantages and Disadvantages of Corporate Debt Restructuring

Businesses use debt restructuring to try to recover from debts that are crushing them. Debt restructuring has proved to be a very useful tool that modifies the ways payments can be made on existing debts. These modifications can occur in the form of an increase in the time to pay off the debt and an adjustment in interest rates. Generally, businesses choose the option of debt restructuring if they are unable to stay on top of debt payments.

Advantages

One of the biggest advantages of debt restructuring is that businesses do not have to file for bankruptcy. First of all, going this route can be exceedingly expensive with attorney and court fees alone coming to $9000 approximately. Secondly, bankruptcy messes up the credit score of the business and also affects its reputation negatively for years to come.

Another advantage is that going this route generally means that bill payments are modified. Monthly payments can be reduced, interest rates lowered and payment periods extended. In the end, what creditors really want is to be able to recoup their money and, therefore, they are generally amenable to adjusting the loan terms as long as they get their payments.

Disadvantages

Unfortunately, not all businesses can go in for debt restructuring. For example, if a company has already utilized this option and still fails to make payments, it may have to file for bankruptcy instead. In addition, if it has to downsize as part of the restructuring it could end up losing very valuable employees and workers who are highly skilled. Even those workers who stay back after the downsizing may not feel very secure about their job security. This, in turn, could lead to bad morale at work and customer service that is subpar. In case the company needs to integrate new technology or change its employees’ responsibilities as part of the restructuring, it could end up facing loss in productivity as long as the employees are on the learning curve.

Potential investors may also be leery of investing in the company for the foreseeable future. This can affect small businesses very badly, since they may end up losing some investors if those investors aren’t reassured about their financial future. Additionally, if a company already has a small number of employees, downsizing is not going to make a significant different to its expenses.

Whenever a business needs to consider debt restructuring, it should consider all pros and cons before making any final decisions.

Article Published by : Restructuring Advisory Group
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