Restructuring debt to improve your business cash flow

The economic environment of the last 7 years has seen the turnover of most businesses reduced significantly.

Whilst many management teams have been proactive in reducing costs to ensure that their business is still profitable, it is common place for repayments on historical bank loans to be a significant burden on a business’s cash flow.

The level of debt carried by your business may have been serviceable when times were good and the loan was initially drawn down but on a reduced level of turnover it may not possible to generate the necessary cash to meet these repayments.

However all is not lost as the majority of banks are now prepared to sit round a table and discuss potential debt restructures with viable businesses. This could mean anything from extending the repayment term, to granting a capital repayment holiday or even writing off a proportion of the debt, all of which will improve your cash flow.

How to restructure your debt with the bank

When restructuring the debt, you should ensure that the agreement is mutually beneficial to both you and the bank. In the vast majority of situations a bank will be in a better position from your business continuing to trade and repaying some of the outstanding loan, as opposed to the business closing down and the bank taking its chances on asset realisations through a formal insolvency process i.e. receivership.

A formal proposal to the bank should be prepared, clearly illustrating what your business can afford to repay and how the ongoing debt should be structured.

The proposal should be supported by a business plan outlining your strategy, the outlook for the market that your business operates in and improvements that management have or will make, financial forecasts for the next five years if possible, and up to date management accounts.

The proposal should be realistic, based on clear assumptions and ideally have some upside for the bank in exchange for some short term breathing space. It is also important to ensure that the proposal does not over-promise on the potential returns to the bank, as you are only likely to get one shot at restructuring the debt. A well prepared restructuring proposal will demonstrate to your bank that you are serious about the future success of your business and given banks’ desire for strong management teams, it will dramatically improve your chances of a successful outcome.

Next steps

If you have gone through all the hard work of maximising your sales / margin and reducing your costs in order to remain profitable, it does not make sense to allow historical loans to be the downfall of your business. We have a highly trained team of advisors who can assist you in preparing a proposal and the ongoing negotiations with your bank.

If you need advice on debt restructuring, please contact your usual DBASS advisor or contact Nathan Oratis on 01 849 8800.

Written by Nathan Oratis, DBASS Manager