Business Debt Restructuring

What is business debt restructuring?

Business debt restructuring changes the terms of existing debts by agreement with creditors rather than replacing them with new borrowing. The creditor stays the same and the debt stays the same. What changes is how and when it is repaid. That distinguishes it from refinancing, where a new agreement replaces the old one, and from consolidation, where several debts are repaid with a new facility.

Restructuring sits between normal trading and formal insolvency. It is a tool for businesses that are viable but temporarily unable to meet their commitments as originally agreed. Used early, it can prevent arrears and preserve lender relationships. Used late, as a substitute for facing a deeper problem, it tends to delay rather than resolve.

Informal restructuring options

• Payment holiday. A pause in capital repayments, sometimes interest too, for an agreed number of months. Interest usually continues to accrue and the missed payments are added to the term or the balance.
• Term extension. The remaining balance is spread over a longer period, reducing the monthly payment. As with any longer term, the total repaid rises.
• Interest-only period. Capital repayments stop for a time while interest continues, cutting the monthly outgoing without the balance falling.
• Standstill agreement. A creditor, or a group of them, agrees not to enforce for a defined period while the business prepares a plan. These are more common with larger facilities and usually come with reporting conditions.
• Arrears capitalisation. Missed payments are added to the loan balance and the schedule restarts, bringing the account out of default.
• HMRC Time to Pay. An arrangement to pay tax arrears by instalments. HMRC considers these on a case-by-case basis, interest continues to accrue, and the business is expected to keep up with new liabilities as they fall due. Details are on GOV.UK and on our HMRC tax debt page.
• Supplier terms. Trade creditors may accept a repayment schedule for an overdue balance in return for continued trade on tighter terms.

When is restructuring appropriate?

Restructuring fits a business whose underlying trade is sound but which faces a temporary squeeze: a large customer paying late, a seasonal dip, an unexpected cost, or a repayment profile that was agreed in better times. The test is whether the business can realistically meet the revised terms. If forecasts show it can, a lender has every reason to agree, because a performing loan on amended terms is worth more to them than a defaulted one.

It does not fit a business whose losses are structural. Reducing payments on a loan does not fix a business that spends more than it earns every month. In that case the conversation needs to be about the business model, and possibly about formal options, before any creditor arrangement is sought.

How to approach lenders

1. Go early. A request made before a payment is missed is a negotiation. A request made after is an explanation. Most lenders have dedicated teams for customers in difficulty and prefer to hear from them sooner.
2. Bring forecasts. A 13-week cash flow forecast and a 12-month projection showing how the business will meet the revised terms are the core of any proposal. Unsupported requests are usually declined.
3. Propose something specific. "Three months interest-only, then full payments resumed with the deferred capital spread over the remaining term" is a proposal. "Can you help?" is not.
4. Be consistent across creditors. Offering one lender better treatment than another can breach the terms of other agreements and, if the business later enters a formal process, can be challenged.
5. Get it in writing. A verbal agreement with a collections agent is not a variation of the contract. Ask for written confirmation of the new terms and of how the arrangement will be reported.

Our article on how to reduce business loan repayments covers the practical conversation in more detail.

Informal restructuring versus formal procedures

Everything above is consensual. Each creditor decides whether to agree, and a creditor that does not agree keeps all of its rights. Formal procedures are different. They bind creditors, including those who vote against, and they require a licensed insolvency practitioner or the court.

• Company Voluntary Arrangement (CVA). A proposal to creditors to repay some or all of the company's debts over a period, typically three to five years. It needs approval by creditors holding 75% by value of those voting and is supervised by a licensed insolvency practitioner.
• Administration. An insolvency practitioner takes control of the company with a moratorium on creditor action, to rescue it, achieve a better result than liquidation, or realise assets for secured creditors.
• Restructuring plan under Part 26A of the Companies Act 2006. A court-sanctioned plan that can bind dissenting classes of creditor. It is designed for larger or more complex companies and involves significant legal cost.
• For sole traders, the individual routes are an Individual Voluntary Arrangement, a Debt Relief Order and bankruptcy, because the business's debts are the individual's debts.

A business that has reached the point where informal arrangements are failing, or where creditors are threatening winding-up petitions, should take advice from a licensed insolvency practitioner. The article on what happens when a business cannot repay its loans walks through the sequence of events.

Risks of restructuring

• Credit record. An arrangement to pay is often reported as such, which can affect the business's and, for sole traders and guarantors, the individual's credit file. Missed payments before the arrangement are reported regardless.
• Covenant breaches. Asking one lender for forbearance can trigger cross-default or material adverse change clauses in other agreements. Read every facility before approaching anyone.
• Security enforcement. A secured lender that refuses to agree terms retains the right to enforce. A lender that agrees may ask for additional security or a personal guarantee as the price of forbearance.
• Higher total cost. Payment holidays and extended terms increase the amount of interest paid over the life of the debt.
• Delay. An arrangement that merely postpones a problem can leave the business in a worse position, with less cash and fewer options, when it resurfaces.

When refinancing or consolidation may still help

Restructuring and new finance are not mutually exclusive. A business that has stabilised after an informal arrangement, and can show six to twelve months of payments made on time, may later be able to consolidate or refinance on terms that reduce the cost further. A business whose problem is a single expensive facility, rather than overall affordability, may find that refinancing that loan solves the issue without any creditor negotiation. And a business with a timing problem rather than a debt problem may be better served by cash flow finance that smooths the gap between outgoings and income.

The honest test is affordability. If the business can service its debts on sensible terms, finance is a tool. If it cannot, more finance is a delay.

Free, impartial help

Business Debtline is a free, impartial advice service for the self-employed and small businesses in England, Wales and Scotland. It can help with budgeting, creditor negotiation and understanding formal options. GOV.UK has guidance on difficulties paying HMRC. Larger companies should speak to their accountant or a licensed insolvency practitioner. Our business debt problems page lists the warning signs that suggest help is needed now rather than later.

Frequently asked questions