If your business hits a rough patch and you're struggling to keep up with loan payments, you may be able to restructure your business loan.
The goal? Lower monthly payments so you stand a better shot of overcoming financial hardship. But you’ll need to make a compelling case to your lender for why it should approve the restructuring.
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What is business loan restructuring?
Restructuring a small-business loan involves working with your lender to renegotiate its terms. It doesn’t replace the loan as refinancing does. Instead, it changes the existing agreement to make repayment more manageable.
Restructuring isn't something lenders agree to casually, however. Often, it's the final move in a series of steps aimed at addressing repayment pressures.
“A restructuring request typically would be the very last resort before final default and/or bankruptcy,” Kevin Janusz, vice president and SBA lending manager at Beneficial State Bank, said in an email.
To make payments on a loan more manageable, your lender might be willing to:
- Lower the interest rate.
- Extend the repayment term.
- Forgive a portion of the loan.
- Allow you to sell collateral to reduce the debt.
When a lender agrees to restructure a business loan, it may set new conditions, called loan covenants, as part of the deal. These covenants can limit how much money the business owner takes out of the company, require other debts to be put on hold until the restructured loan is repaid or give the primary lender priority over other creditors when it comes to collateral. In some cases, the lender may even place the business in receivership temporarily to review its financial health before approving the restructuring.
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Pros and cons of restructuring a business loan
Pros
Improves cash flow by reducing monthly loan payments.
Can help avoid loan default or bankruptcy.
Doesn’t require new financing.
Cons
Requires lender approval, which isn’t guaranteed.
Requires proof of financial hardship.
May increase total interest costs.
Forgiven debt could be taxed as ordinary income.
Lenders might require additional collateral or other guarantees.
When should you try to restructure a business loan?
Reach out to your lender as soon as you see signs of long-term financial trouble, such as consistently negative cash flow, declining revenue or a shrinking customer base.
While restructuring your business loan is a long-term solution, your lender may suggest a temporary fix if it looks like your situation might improve near-term. Examples include a pause in payments or allowing you to make interest-only payments for a while.
In either case, you’ll need to make a strong argument to your lender why it should adjust the loan terms in your favor.
A common reason is being at risk of default or bankruptcy. Many lenders would rather change the loan’s terms to recover part of the balance than have to force a borrower into default and risk getting nothing at all. This might be especially true when a significant outstanding balance is at stake.
You'll stand a better chance of getting your business loan restructured if both you and your lender see a clear path to long-term recovery, Janusz says.
🤓 Nerdy Tip
Because restructuring a business loan is a complicated process that involves permanent changes to your loan agreement, you should try to recruit the help of a business attorney who can guide you through the process. If you don’t have the means to consult with a business attorney, you may be able to get free advice through your local Small Business Development Center, SCORE or another nonprofit business support organization. Explore other options first
You might be able to recover from a financial setback without permanently changing your loan’s terms. Here are some alternative strategies that could help:
- Seek short-term relief from your lender. If there’s an end in sight to your financial hardship, your lender may offer forbearance or deferment or may temporarily allow interest-only payments. These options can give you breathing room to recover from a short-term setback.
- Refinance your loan. Replacing a current loan with a new one that offers a lower interest rate or longer repayment period can help lower payments. This can be especially useful if your credit score has improved, since you may qualify for a loan with more favorable terms. Just keep in mind that refinancing a business loan may result in higher interest costs in the long run. You can compare new financing options on NerdWallet's list of the best small-business loans.
- Consolidate your debt. If you’re having trouble paying back multiple loans, consolidating that debt into a single loan may help. If your business debt consolidation loan offers a lower interest rate or extended term, your monthly payment may be lower than the combined total of what you’re currently paying.
- Reduce expenses or improve revenue. Restructuring a business loan should be your last resort. Before going down that path, explore ways to cut costs or seize business growth strategies that may improve cash flow long term.
How to approach your lender
Not all lenders are willing to change loan terms. But, if you can prove financial hardship and have a solid plan in place to turn things around, your lender may consider it.
It also helps if you have a positive relationship with your lender. It’s best to reach out before you miss a loan payment, as this shows you’re proactive, transparent and committed to repaying your loan.
Here’s how to approach your lender:
- Know what you can afford. Figure out what kind of payment structure you can realistically manage. Do you need to extend the repayment period? Pay a lower interest rate? Ask to have some of your balance forgiven? Coming to the table with a clear understanding of what will help you repay the loan builds trust and shows you’re serious about staying on track.
- Come up with a game plan. Lenders want to know you stand a chance of turning things around in your business so you can continue making payments on your loan long term. That’s why it helps to have a business plan drafted that outlines how you’ll stabilize your business and improve cash flow. It can also help to highlight times when you’ve overcome past business setbacks.
- Have your information ready. You’ll have to back up your request with documentation, such as recent financial statements. You’ll also likely have to submit a hardship letter that explains the situation, how it started and your recovery plan. Having all this ready to go speeds up the decision-making process.
Not sure what to say to your lender?
Check out our sample script for requesting a pause on business loan payments. While a pause is different from restructuring a business loan, you can use this script to give you an idea of how to start the conversation and prepare for questions your lender might ask.
