In multiple articles, we have talked about the most used and important ways for restructuring debts. We have also seen different cases of multiple organizations from various industrial sectors applying some credit agreement to avoid bankruptcy. In addition, we can say that all these shown methods have given to us a very significant context to know and understand how credits work and how a good payment agreement can save any business from a critical financial situation.
As we have mentioned, we have seen different debt agreements, but it is important to define and understand which one is the best for a particular situation. In other words, it is vital for companies to understand the most common payment terms, but it is even more important to know when to use one method or another, and their advantages and disadvantages.
For avoiding bankruptcy, there are multiple payment alternatives, but there are three which are the most used and recognized ones: debt unification, refinancing and debt selling. Let´s see in a few words each one of them, with their advantages and disadvantages.
Under this method, a specific debtor under a critical situation can unify all its credits into a single one, having a unique interest rate and a unique creditor. In other words, with a debt unification, a particular company with multiple financial agreements, can merge all its economic commitments into one payment, keeping just one payment rate and with the conditions of a single creditor.
The advantages of this method are that debtors can have direct communication with a single creditor, which simplifies the relationship between them. Another advantage is that creditors can get more cash, gaining more liquidity and benefits. in addition, if a debtor unifies its debts into a single one, it can program in a better and easier way its payments and financial commitments, which can help it to avoid bankruptcy or a liquidity situation.
However, for having a financial debt unification, the debtor must show a willingness to pay its economic responsibilities and the resources to do it. In addition, this alternative could work if the creditor trusts in the debtor and has sufficient guarantees from it to make an agreement. Put differently, a company with payment issues can unify its debts if the creditor has the enough confidence and sees the means to this.
One of the biggest disadvantages of this alternative is that if the debtor fails with its payments or does not respect the agreement terms, the relationship with its creditor can deteriorate, creating possibles difficulties for a renegotiation or a new payment agreement.
Through this alternative, a particular organization with financial issues can reorganize its payment responsibilities into more comfortable ones. Thanks to a debt refinancing, organizations not only has the possibility of having better payment conditions, but also the chance to have more cash flow, so they can assume their working and economic duties in a simpler way.
One of the most significant advantages for a debtor with a credit refinancing is to renegotiate its credits to have better payment conditions, like lower fees, which gives to them more cash flow as we mentioned before. Another important benefit with this alternative is to obtain better interest rates, due to the payment renegotiation.
However, one of the principal disadvantages for this alternative is that companies refinancing their credits can take more time to pay a specific debt. In other words, through a credit refinancing, organizations can gain more cash flow, but take more time for paying their financial responsibilities. Another disadvantage of this option is that companies can have more comfortable and better fees, but maybe the interest rates are higher, so they will be paying much more money than they owed before the refinancing.
The credit selling
The credit selling alternative is a very used method for a debt restructuration. Through this option, companies with economic problems can sell their debts to a financial institution or organization who assume the debt, giving to the company with issues the possibility of having better payment conditions. In other words, a credit selling gives to a specific debtor, the opportunity of acquiring a new debt with a different creditor, giving to it the other financial compromise, so it can pay it. The credit selling can be positive if the company selling its debt has the willingness to pay and understand the terms offered by the new creditor
Understanding and knowing these three restructuring alternatives, then we can conclude that none of them is better than another, they just have different conditions and give to a specific debtor the alternative to using them according to their needs. Put differently, these three methods can help or save a particular organization from bankruptcy, if they understand which of these alternatives is better for their situation.
Related: Useful Tips to Buy a Distressed Business by Suzzanne Uhland
* Featured Image courtesy of Ed Ivanushkin at Flickr.com