Guide to Restructuring a Business Loan

If you hit a rough patch in your business and are struggling to keep up with loan payments, you may be able to restructure your business loan.

The goal? Lower monthly payments so you stand a better shot of overcoming financial hardship. But you’ll need to make a compelling case to your lender for why they should allow it.

Restructuring a small-business loan involves working with your lender to renegotiate its terms. It doesn’t replace the loan, like refinancing does. It simply changes the existing agreement to make repayment more manageable.

Restructuring isn’t something lenders agree to casually, however. Often, it’s the final move in a series of steps aimed at addressing repayment pressures.

“A restructuring request typically would be the very last resort before final default and or bankruptcy,” said Kevin Janusz, vice president and SBA lending manager at Beneficial State Bank, in an email.

To make payments on a loan more manageable, your lender might be willing to:

• Lower its interest rate. 

• Give you more time to pay it back.

• Forgive a portion of the loan. 

• Let you sell collateral to pay down the debt.

Reach out to your lender as soon as you see signs of long-term financial trouble, such as consistently negative cash flow, declining revenue or a shrinking customer base. It’s best to start the conversation early to discuss possible options before you miss any payments, if possible.

While restructuring your business loan is a long-term solution, your lender may suggest a temporary fix if it looks like your situation might improve nearterm. Examples include a pause in payments or allowing you to make interest-only payments for a while.

In either case, you’ll need to make a strong argument to your lender why they should adjust the loan terms in your favor.

A common reason? Being at risk of default or bankruptcy. Many lenders would rather change the loan’s terms to recover part of the balance than have to force a borrower into default and risk getting nothing at all. This might be especially true when a significant outstanding balance is at stake.

You’ll stand a better chance of getting your business loan restructured if both you and your lender see a clear path to long-term recovery, Janusz says.

You might be able to recover from a financial setback without permanently changing your loan’s terms. Here are some alternative strategies that could help:

• Seek short-term relief from your lender. If there’s an end in sight to your financial hardship, your lender may offer a payment pause or allow you to make interest-only payments for a short time. These options can give you breathing room to recover from a short-term setback.

• Refinance your loan. Paying off a current loan with another one that offers a lower interest rate or longer repayment period can help lower payments. This can be especially useful if your credit score has improved, since you may qualify for a loan with more favorable terms. Just keep in mind that refinancing a business loan may result in higher interest costs in the long run. You can compare new financing options on NerdWallet’s list of the best small business loans.

• Consolidate your debt. If you’re having trouble paying back multiple loans, consolidating that debt into a single loan may also help. If your business debt consolidation loan offers a lower interest rate or extended term, your monthly payment may be lower than the combined total of what you’re currently paying.

• Reduce expenses or improve revenue. Restructuring a business loan should be your last resort. Before going down that path, explore ways to cut costs or seize business growth strategies that may improve cash flow long term.

Not all lenders are open to changing the terms of a loan. But if you can prove financial hardship and have a solid plan in place to turn things around, your lender may consider it.

It also helps if you have a positive relationship with your lender. That’s why it’s best to reach out before you miss a loan payment. Doing so shows you’re proactive, transparent and committed to paying back your loan.

Here’s how to approach your lender:

• Know what you can afford. Figure out what kind of payment structure you can realistically manage. Do you need to extend the repayment period? Pay a lower interest rate? Ask to have some of your balance forgiven? Coming to the table with a clear understanding of what will help you pay back the loan builds trust and shows you’re serious about staying on track.

• Come up with a game plan. Lenders want to know you stand a chance of turning things around in your business so you can continue making payments on your loan long term. That’s why it helps to have a business plan drafted that outlines how you’ll stabilize your business and improve cash flow. It can also help to highlight times where you’ve overcome past business setbacks.

• Have your information ready. You’ll have to back up your request with documentation, such as recent financial statements. You’ll also likely have to submit a hardship letter that explains the situation, how it started and how you plan to recover. Having all this ready to go speeds up the decision-making process.