Gwen Guthrie said she would not date a guy without a job when she had bill collectors at her door. Running a business, as in personal lives, everyone has bills to care of, so when they overwhelm us, we choose to take up loans. Of course, the program 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 an excellent one creates an an opponent, 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 a range 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 Benefits of Debt Restructuring?
Low-Interest Rates
The essence of choosing 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 are able to agree with the lender to lower the eye rates at first until you have returned 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. To begin with, you do not pay as much as before, meaning that you have more money available to run your company. 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 schedule due to the payments burdening you. If the scenario persists for a long time, it could sink your business because you will not have access to enough money to operate effectively and efficiently. It may especially be difficult for a business attempting to launch; it could be on the deathbed before it is on its feet. With a lot more improved repayment terms, you are able to rearrange your finances to ensure that you keep the business afloat. After all, you will pay much lower interest rates, and some creditors could 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 money difficult. The same case occur 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 monthly, making it easy to keep track of your money. 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 lots of money are listed. Upon facing some financial constraints that make it impossible to repay a debt, creditors will rush to accept listed assets and sell them to recover their money. With debt restructuring, this kind of eventuality is unlikely to happen. With minimum payments minimizing interest rates, you are better positioned to repay your debt, thus protecting the business assets. If you take up debt restructuring quick enough before creditors move to sue you for defaulting, you prevent them from executing liens.
What would be the Disadvantages of Debt Restructuring
Credit Score Might 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 short 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 observe that should you choose to declare bankruptcy, it'll remain on your credit report for at least 10 years, making it impossible to acquire a new loan.
It Could be Expensive
You can decide to restructure your financial troubles 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 rates of interest within a certain period. Although this may seem like a good option, it involves considerable time and money. Bankruptcy proceedings take much longer than debt management plans, as revealed by Value Penguin. Although Chapter 13 bankruptcy fees cannot rival Chapter 11 bankruptcy charges close to $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 which will set you back $100. This is still along with your attorney fees, yet you're 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, which 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 do you a favor by decreasing 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 promptly.