Debt Restructuring – Business Best Practice

  • 24 May, 2019
  • Greg Pierlot

Over recent months, we have seen more businesses starting to look at Debt Restructuring as a way to:

  • More efficiently use their assets
  • Free up cashflow
  • Correctly align debt to purpose/assets
  • Consolidate borrowings
  • Obtain improved pricing and/or conditions

Debt Restructuring - Why Does it Become Necessary?

Debt Restructuring becomes necessary because business is dynamic. As a business grows, its financing structure often doesn’t reflect changes within the business.

Too often finance is provided to meet a need at a particular point in time without taking into context the overall group position.

The method of funding is usually driven by:

The end result often being a complex and cumbersome debt structure that ultimately impedes business operations, cashflow and/or wealth creation.

  • Urgency
  • Lender appetite
  • Ease of access to the needed finance (Funding against personal assets)

Debt Restructuring - Common Causes

Common examples we see that lead to debt restructuring include:

  • Borrowings in personal names when they should be in the business name. Which can limit the capacity for personal wealth creation
  • Borrowings in the wrong entity name
  • Property being held in the trading company
  • Incorrect product selection (Business instead of Asset/Equipment Finance)
  • Short-term funding being used for long-term assets. Funding not being match to asset life
  • Repayment programs not aligned to cashflow or business trading cycles
  • Immediate commencement of amortisation – inadequate allowance for commissioning and/or new business launch phase
  • Unrealistic terms and conditions being set by Lenders through strict adherence to “policy” – not understanding the impact on the business

Historic Business Structures

Another factor that can lead to Debt Structuring is the business structure not being relevant to current operations.

We are seeing an increasing incidence of structures which have been in place for many years that:

  • Provide inadequate asset protection
  • Do not separate distinct business functions – potentially exposing the business to contagion risk
  • Are overly complex (Can be a barrier to finance)
  • Make eventual sale of part of the operations difficult
  • Do not take full advantage of the corporate tax rate

Whilst there is a cost to changing a business structure, it is critical to regularly get legal and accounting advice to ensure the business structure remains relevant for both today and the future.

Changed Banking Policy - Why the Right Structure is Critical!

Another reason to ensure debt is correctly structured is that a number of Banks now separate their business and personal lending functions in relation to business clients.

Regardless of debt size, borrowing history, the Business Bankers and Business Banking Centres in the affected Banks, can no longer approve personal lending (Home Loans, Investment Loans etc) as they have in the past.

The challenge for business owners here is that when this occurs, whilst a Business Banker can view the borrowing in the context of the overall Group position, the Personal Bankers assess it in isolation using very stringent and rigid criteria. The end result being it is now taking much longer to process loan applications.

To minimise disruption and avoid frustration this is yet another reason to ensure your debt structure is correct.

Best Practice - Align Structure to Purpose

The optimal debt structure for a business should be one that is prudent and aligned to both the owners personal and business objectives.

One that:

  • Frees up cashflow for growth and/or wealth creation
  • Ensures the right products are utilised
  • The debt is held in the correct name and against the right assets
  • Delivers advantageous pricing, terms and conditions

Debt Restructuring - The Keys to Success!

We have found the keys to success with any Debt Restructuring are:

  • Involving us early to explore what options may be available
  • Seeking professional advice to identify where the debt should sit from a legal and tax perspective
  • Ensuring finalised historical Financial Accounts, Management Accounts and, if needed, Financial Forecasts are available
  • Presenting a detailed Finance Proposal to a panel of carefully chosen Lenders to ensure they understand your business, the reasons for the restructure and the benefits of the change

If you feel your current debt structure is restrictive and is impeding your business operations, or wealth creation opportunities, and would like to learn more about how we can assist don’t hesitate to get in touch.