If your company is dealing with a long-term financial setback — not just a slow month — 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 NerdWallet.
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.
Restructuring usually comes with new conditions, called loan covenants. “It’s very common for lenders to tighten or add covenants as part of a restructuring process,” Leslie H. Tayne, Esq., finance and debt expert and founder of Tayne Law Group, told NerdWallet in an email — especially when the lender isn’t first in line on your collateral.
She points to the “no-stacking clause” as one of the most common. It stops you from taking on new debt that could interfere with your lender getting repaid. “Think of covenants as guardrails,” Tayne said. The lender agrees to restructuring, but you agree to stricter guidelines that keep the business on track.
Common covenants include:
- Limits on owner draws. You may not be able to take as much money out of the business.
- Holds on other debts. Your other creditors may have to wait until the restructured loan is repaid.
- First claim on collateral. Your primary lender may move ahead of other creditors if assets are sold.
In some cases, the lender may even place the business in receivership. A receivership is when a court appoints a neutral party to take temporary control of the business’s operations and assets to protect its value while the restructuring is being worked out.
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Restructuring vs. refinancing vs. short-term relief
Restructuring is just one of the ways to deal with a struggling loan. It’s important to pick the right solution for your financial situation. Here’s how restructuring compares to other options:
What happens | Best for | Cost impact | |
Restructuring | Your existing loan agreement is permanently changed. | Long-term hardship with a credible recovery plan. | May increase total interest; forgiven debt may be taxable. |
Refinancing | A new loan pays off the old one. | Businesses that are still in good standing, ideally with improved credit. | New underwriting; may increase total interest. |
Forbearance/deferment | Payments pause or shrink temporarily. | Short-term, clearly time-limited setbacks. | Interest usually keeps accruing. |
Learn more about refinancing, forbearance and deferment. | |||
Pros and cons of restructuring a business loan
Pros
Improves cash flow by reducing monthly loan payments.
Can help avoid loan default or bankruptcy.
No new loan application or underwriting.
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 (though exceptions apply).
Lenders might require additional collateral or other guarantees.
❗Don’t get tripped up by a possible tax bill. If your lender forgives part of your balance, the IRS may treat that forgiven amount as taxable income. This means relief on your loan can create a tax bill you now have to pay.
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, Tayne said. That’s especially true when a large balance is still owed.
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 said.
🤓Nerdy Tip
Restructuring a business loan is complicated and involves permanent changes to your loan agreement. It may be worth working with a business attorney who can guide you through the process. If you can’t afford one, you may be able to get free advice through your local Small Business Development Center, SCORE or another nonprofit business support organization.Consider these alternatives 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. A new loan with lower rates or longer terms can reduce payments. This works best if your credit 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 with 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 pursue growth strategies that may improve cash flow long term.
How to approach your lender about restructuring
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:
1. 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?
Be realistic: Asking to pay a fraction of what you owe when your finances show otherwise is a surefire way to sink your request, Tayne said.
Knowing exactly what you need, grounded in your actual numbers, builds trust. It also shows you’re serious about repaying the loan.
2. Come up with a game plan.
Lenders want to know that you can turn things around and make payments on your loan long term. Draft a business plan that outlines how you’ll stabilize your business and improve cash flow.
“The single most important factor is that the proposed plan is realistic, well-supported and detailed," Tayne said. It can also help to highlight times when you’ve overcome past business setbacks.
3. 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. Ask your lender directly what it needs before sending anything.
If a first request is denied, ask why and if there’s an appeal process, Tayne said. She recommends revising your plan to address each of the lender’s specific concerns before reapplying.
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.
Article sources
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- 1.Internal Revenue Service. Topic no. 431, Canceled debt – Is it taxable or not?.
