Small Business Debt Consolidation

The advantage of refinancing debt is that the equity is retained within the business and its owners retain control. By freeing up short-term capital, business profits can be generated for the company while at the same time any interest on a business loan can be deducted from corporation tax. The main disadvantage is that the more indebted business becomes, the more difficult it is to reduce the debt in the long run or obtain additional finances in future due to a poor credit history report.

Lenders are increasingly focused on the risk of bad debt, as more businesses fail leaving the creditors with a potential investment loss. The application criteria for business consolidation loans depends upon the nature of the business, their track record with the individual bank or lender, the degree of financial information provided, proof of ownership with regards to property and equipment and tax and accounting returns. Commercial lenders are just as nervous as residential mortgage lenders, in light of the credit crunch. Cash rich major banks that have less exposure to the American sub prime mortgage market are now targeting business loans as an area of growth and profitability. The application process may seem more rigorous than previous encounters. Attention should also be focused on comparing lenders rates, terms and covenants, to ensure that the best possible deal can be achieved.

Debt Restructuring - debt restructuring usually occurs when companies run into difficulties. The process usually involves complex negotiations with the creditors in order to extend the payment terms of the loan to reduce the size of the debt. For larger companies, it is becoming more and more common to exchange or swap debt for equity. In other words, the preferential or secured creditors will accept a percentage of the shares of the company in exchange for reducing or writing off the business debt. This helps the company survive and prevents it from going into bankruptcy. Most creditors would prefer to avoid court proceedings and not to force the company into liquidation. This is because creditors would prefer to get some money repaid as opposed to a smaller sum. In addition, creditors that have a share in the company have a greater degree of control by voting rights or any shareholder agreements put in place during the exchange negotiation. On the other hand, creditors may be unwilling to participate in a debt for equity swap, if they believe that the company will inevitably collapse. This is because share equity holders are usually ranked lower than preferential creditors and secured creditors who would reclaim the companies' assets first.