Corporate debt restructuring is a process that allows a company facing cash flow problems due to the burden of debt repayment to potentially reduce and renegotiate its outstanding debts so it can continue to operate without closing down or going through a bankruptcy.

Corporate debt restructuring can be structured in many different ways based on the needs of the company and the owners, and is often a preferable alternative to bankruptcy for both the business owners and the creditors. Debt restructurings typically involve the company creditors agreeing to a reduction of debt and a renegotiation of payment terms to allow the company to continue to operate. This can be done by utilizing provisions available under the Bankruptcy and Insolvency Act (BIA) or by working directly with the company creditors. Each option has its benefits, and also its own restrictions, and carefully understanding the benefits to the company of each is very important. Both options must be carefully planned and thought through prior to being implemented as, once the company goes down the road of restructuring, it needs to be fully committed in order to see the long term benefits, and there is usually no turning back.

Small and medium sized businesses are increasingly seeing a need for restructuring. It can be a very proactive way for dealing with financial challenges and keeping a company operational before creditors take more extreme measures, which ultimately can lead to the business being shut down. Every case is different with the options that are available, but the quicker the company recognizes the warning signs, the more options they will have to restructure.

If it is left too late and the company creditors run out of patience, the business will ultimately lose control of the restructuring and its ability to negotiate. The restructuring or receivership will now be controlled by the creditors or the creditors’ representation and will be done on the terms favoring their interests and not the interests of the business owner. If the problems are identified early enough, and by hiring their own representation, the restructuring terms can be dramatically different and focused on the needs of the company and the business owners.

Careful renegotiation of a company’s outstanding liabilities can reduce the burden of the debts on the company’s cash flow, by decreasing the principle repaid, eliminating future interest and increasing the time the company has to pay the new amount. This allows a company to increase its ability to meet the obligations and substantially increase cash flow and stay operational.

So why would creditors agree to a restructuring?

Major banks and lenders understand that a company going through a restructuring is on the verge of closing or bankruptcy and neither will usually provide any significant return to them. The new payment arrangement will be structured in a manner that provides the creditors a better return than bankruptcy or liquidating the assets and closing and this will usually convince them it is a much better alternative.
Also, for suppliers there may be the option for future business if they are willing to work with the company to restructure the old liabilities they have been unable to pay. Bankruptcy or company closure will not provide any opportunity for future business.

Small and medium sized businesses are likely to do business with companies of a similar size and mindset, so ultimately the impact of one failure can increase the pressure on many others. Local suppliers may rely on the business from the struggling company and look at the long term potential of working with them to keep them in business vs them going out of business. It may be a very important market for their product and the loss in business only increases the challenges they already face to compete with the huge corporations.

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