Business debt is not inherently bad. In many cases, it is a necessary tool for growth, stability, or survival during challenging periods. Problems usually arise when debt terms no longer match a company’s cash flow or operating reality. Understanding the major types of business debt is the first step toward choosing the right restructuring approach.
Bank Loans and Term Loans
What They Are
Bank loans and term loans are among the most common forms of business debt. They typically involve a fixed repayment schedule, a defined interest rate, and a clear maturity date. These loans are often used for expansion, equipment purchases, or working capital.
Common Challenges
When revenue declines or expenses rise unexpectedly, fixed monthly payments can strain cash flow. Covenants tied to financial ratios may also create pressure if performance slips.
Restructuring Options
- Extending the loan term to reduce monthly payments
- Refinancing into a lower interest rate if credit allows
- Temporarily modifying payment schedules during downturns
Business Lines of Credit
What They Are
A business line of credit allows companies to borrow up to a set limit and repay only what they use. Interest is charged on the outstanding balance rather than the full credit amount.
Common Challenges
Because lines of credit are often used repeatedly, balances can linger longer than planned. Variable interest rates may also increase borrowing costs over time.
Restructuring Options
- Converting revolving balances into a term loan
- Renegotiating interest rates or usage limits
- Establishing a structured repayment plan to reduce dependency
Credit Card Debt
What It Is
Business credit cards are frequently used for short term expenses and cash flow gaps. They are easy to access but usually carry higher interest rates than traditional loans.
Common Challenges
High interest charges can cause balances to grow quickly, especially if only minimum payments are made. Multiple cards can also make tracking obligations difficult.
Restructuring Options
- Consolidating balances into a single loan with lower interest
- Negotiating temporary hardship programs with issuers
- Implementing strict usage controls to prevent future buildup
Merchant Cash Advances
What They Are
Merchant cash advances provide upfront capital in exchange for a percentage of future sales. Repayments are typically deducted daily or weekly from revenue.
Common Challenges
These advances often come with high effective costs and aggressive repayment schedules. During slower sales periods, deductions can severely impact operating cash.
Restructuring Options
- Renegotiating the daily or weekly holdback percentage
- Settling the advance for a reduced lump sum
- Refinancing into a more traditional loan structure
Equipment Financing and Leasing Debt
What It Is
This type of debt is tied directly to equipment such as vehicles, machinery, or technology. The equipment itself usually serves as collateral.
Common Challenges
If equipment becomes outdated or underutilized, payments may no longer make financial sense. Maintenance costs can also add to the burden.
Restructuring Options
- Extending the financing term to lower payments
- Refinancing based on current equipment value
- Returning or replacing equipment under revised lease terms
SBA Backed Loans
What They Are
Loans backed by the Small Business Administration offer favorable terms and longer repayment periods. They are commonly used for acquisitions, real estate, or refinancing existing debt.
Common Challenges
Although terms are favorable, the approval process is strict. When cash flow tightens, falling behind can have serious consequences due to personal guarantees.
Restructuring Options
- Requesting payment deferrals during financial hardship
- Modifying repayment schedules through the lender
- Exploring refinancing options if eligibility allows
When Debt Restructuring Makes Sense
Recognizing the Right Time
Debt restructuring is most effective when addressed early. Waiting until accounts are severely delinquent reduces leverage and available options.
Strategic Benefits
Proper restructuring can improve cash flow, stabilize operations, and create breathing room for long term planning rather than short term survival.
Key Considerations
- Clear understanding of total debt obligations
- Realistic assessment of future cash flow
- Professional guidance when negotiations become complex
Final Thoughts
Understanding the different types of business debt allows owners to make informed decisions when financial pressure builds. Each debt structure has its own risks and opportunities. With the right approach, restructuring can transform debt from a threat into a manageable part of a healthier financial strategy.