Gwen Guthrie said she would not date a man without a job when she had bill collectors at her door. In business, as in personal lives, we all have bills to care of, and when they overwhelm us, we opt to take up loans. Of course, the plan is usually to pay as soon as possible to avoid high-interest rates, but sometimes, nothing goes as planned. Since someone once said that a small loan makes a debt while a great one creates an an enemy, you might find yourself in need of much friendlier terms to repay the loan. In such a case, you will seek debt restructuring to prevent defaulting on your loan, which can have quite an array of adverse consequences. While it may seem like your only way out, it has its advantages and disadvantages, which we will discuss below to enlighten you before you settle on it.
What are the Advantages of Debt Restructuring?
The essence of opting for debt restructuring is to make it easy for you to repay your loans without affecting your business. One of the things creditors will do is lower your interest rates. High-interest rates can put a strain on the repayment schedule. Hence, you can agree with the lender to lower the interest rates at first until you are back on your feet again, then they can use whatever rate they feel is appropriate. The great thing about a lower interest rate is that it has a domino effect. First of all, you do not pay as much as before, meaning that you have more money available to run your business. Once you have enough cash flow, the growth of the business is inevitable.
Keeping Business Afloat
You settle for more favorable terms in your loan repayment plan due to the payments burdening you. If the scenario persists for a long time, it could sink your business because you will not have enough money to operate effectively and efficiently. It can especially be difficult for a business trying to launch; it could be on the deathbed even before it is on its feet. With much more improved repayment terms, you can rearrange your finances to ensure that you keep your business afloat. After all, you will be paying much lower interest rates, and some creditors might even lower the principal amount to be repaid.
Better Financial Management
At home, you might have different bills coming in at varied times of the month, which can make budgeting for cash difficult. The same case happens in business; if you have several loans with different repayment times, your cash flow can be affected. According to LendFin, some management plans ensure that the debts are consolidated into one. As such, you will only have repayment per month, making it easy to keep track of your finances. Budget it also takes much less time.
Protect Business Assets
Usually, whenever a business takes up a loan, it has to provide collateral, and assets worth a lot of money are listed. Upon facing some financial constraints that make it impossible to repay a debt, creditors will rush to take the listed assets and sell them to recover their money. With debt restructuring, such an eventuality is unlikely to happen. With minimum payments and lower interest rates, you are better positioned to repay your debt, thus protecting the business assets. If you take up debt restructuring fast enough before creditors move to sue you for defaulting, you prevent them from executing liens.
What are the Disadvantages of Debt Restructuring
Credit Score Could be Negatively Affected
According to MoneyLife, debt restructuring while offering relief to those struggling to keep up with their debt repayments could still suffer later when they need a loan. Although banking officials disclosed that restructuring your debt will not affect your credit score, this article highlights an issue that might be overlooked. A high credit score is attractive to lenders because it indicates you are creditworthy. However, if you take up a loan for restructuring, lenders can indicate the purpose for which it has been availed, making future creditors wary of your ability to handle your finances. As a result, your credit score goes down, and even the chances of you getting a credit card for personal use significantly declines. You should also note that should you choose to declare bankruptcy, it will remain on your credit report for at least 10 years, making it impossible to acquire a new loan.
It Can be Expensive
You can decide to restructure your debt by filing for bankruptcy. The process involves a judge who can assess your debts. He can choose to wipe out some of the debt and have you repay the rest at lower interest rates within a certain period. While this may seem like a good option, it involves a lot of time and money. Bankruptcy proceedings take much longer than debt management plans, as revealed by Value Penguin. Although Chapter 13 bankruptcy fees cannot compare to Chapter 11 bankruptcy charges of around $75,000, it still has its expenses. The fee is $310, a trustee may charge you $20, and you can be required to take up a personal financial management course that will set you back $100. This is still in addition to your attorney fees, yet you are already struggling with strained finances.
Prolonged Repayment Period
The future is dynamic, and you probably had not factored in different things that would make it impossible to repay your debt on time. Unfortunately, that will cost you; the longer you take to pay, the more the interest paid, which is why borrowers are advised to repay their debts soonest possible. Although it may seem like the creditors are doing you a favor by lowering the interest rate, you are only prolonging the inevitable. Therefore, it is no wonder that personal financial management courses are advisable for anyone who cannot repay his loan on time.