Restructuring your company’s debt during a pandemic


The COVID-19 pandemic has had a devasting impact on the operations of businesses across the world. Amid lockdowns in many parts of the world, businesses had to deal with perhaps the most challenging situations in running their businesses.

From laying off staff, to pay cuts and total shutdowns, the pandemic has shaken the foundations of many businesses. As cashflows for businesses were deeply affected, businesses had to incur debts to keep afloat as they found it difficult to retire debts already owed. In this article, we will discuss some measures businesses can adopt in financing debts amid this pandemic.

Debt vulnerabilities during crisis

In economies like Ghana’s, the biggest debt provider to businesses and individuals are commercial banks, who redistribute money from those who have excess (depositors) to those who need money for consumption or investment (borrowers). For this reason, banks may not have sufficient liquidity to lend to borrowers should the existing borrowers not repay their debt or pay on time. In very extreme but rare cases, banks may not be able to have sufficient funds to return the depositors funds to them when they need it.

During a pandemic, there is a general decline in demand of goods and services, which will impact the revenues of the businesses. Most businesses will have fixed costs like paying of salaries, utilities, and other operating expenses. If a business does not have sufficient cash buffers to close the revenue gap, it means the requirement for external financing will increase during this period.

The pandemic also brings along with it uncertainty and general economic frailties which makes lenders, like commercial banks, tighten access to credit to businesses to enable them minimize their exposure to the general uncertainty; and their ability to keep depositors money safe.

Also, for businesses, contracting more debt during this period may not be the best option, given that debt repayments are fixed and not dependent on the business cycle. Therefore, the risk of inability to repay the debt is pronounced and may lead to debt distress, which could ultimately bankrupt the business, if not managed well.

To manage your debt vulnerabilities, these are some steps businesses may take:

Re-negotiate terms of loans

Businesses should actively engage their debt providers to renegotiate payment terms – interest rates, tenure of debt, repayment amounts. While most lenders will want to be proactive in these negotiations, it is advisable for the business to take the first step before any repayment challenges begin to set in. It is also much easier to re-negotiate if the business has demonstrated meeting the terms of the debt arrangement prior to the pandemic.

Re-negotiation of Payment Terms with Suppliers and Clients

Liquidity is a key ingredient for any business during a pandemic. It is therefore important to keep money in the business if possible. Renegotiating with key suppliers for longer payment terms while ensuring faster collection from clients will help a great deal to improve the liquidity in the business.

This may come at the expense of sacrificing some margins. It is a balancing act that businesses will have to deal with during these difficult times. To improve chances of renegotiation, it is important to keep good relationships with suppliers and clients during “normal” times.

Government stimulus packages

Given the global nature of pandemics and the importance of businesses to all economies, governments and other stakeholders usually intervene with various programmes to support businesses.

This could come in the form of stimulus packages, grants, support to lenders to reduce cost of borrowing or improve liquidity of lenders to enable them to provide more debt. As a business, it is important to be on the lookout for such programmes.

Some of these programmes come at no cost or no expectation of paying back and may be passed through lenders or other institutions. There would be selection criteria depending on the programme, and it is important the business familiarizes itself with the requirements.

Efficient business practices

Probably an immediate action within the control of businesses is to identify and eliminate wastes within the business and improve efficiencies.  During “normal” times, some business activities may be taken for granted as necessary for the business. However, in a pandemic, it is crucial to seek out areas within the business where improvements can be achieved to reduce waste and cost.

Some of these such areas include reducing power consumption, water consumption, fuel consumption, stationery and printing, etc. You would be surprised at how much a business can save with these simple steps to improve efficiency. At the height of a pandemic, success may just mean keeping the business afloat. In that case, decisions should be taken to keep the business afloat so that when the tide starts to rise, the business can rise with it.

Equity – skin in the game

While the general slowdown during pandemics impact everyone and every business to a large extent, shareholder support during this period can go a long way to bolster the business to enable it to survive the stressed conditions.

Shareholders have more skin in the game amongst all stakeholders; and should they have the ability, it will be a good option to inject more financing into the business during a pandemic or general stress. Shareholders can be called on to provide additional equity or even shareholder debt, which usually comes at better terms to commercial lenders.

In conclusion, the general slowdown in demand and general uncertainties during a pandemic negatively impact businesses; and may result in the need for external financing to keep the business stable.

At the same time, commercial banks may also tighten access to credit to protect liquidity. It is therefore important for businesses to look at other financing strategies to ensure that their businesses stay afloat and survive the pandemic.

There is no single strategy or approach that will work the magic, but business owners and managers must look for the ideal balance and trade-off depending on the specific circumstances of the business. This period is a trying period and success may just mean being resilient enough to stay afloat till the situation improves. 

The writer is the Head, Commercial Banking, Stanbic Bank


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