Debt Restructuring or Hard Money: Is One Better Than the Other?

Companies unable to make good on outstanding debt are not unusual. Moreover, many businesses carry at least some amount of debt in perpetuity. Indebtedness is one of the costs of doing business. How a company handles not being able to repay its debts is more important than the debts themselves. Repayment capability determines a company’s long-term future.

There are times when a company must choose between debt restructuring and new financing. And often times, one of the options for new financing is hard money. This presents a real dilemma. So many experts would tell you that restructuring is always better than hard money. But that may not be true.

Hard money is a very misunderstood option. It has a bad reputation due to a small minority of lenders whose bad practices have tainted the entire industry. On the other hand, legitimate hard money lenders who do everything by the book can offer a good alternative to debt restructuring.

  1. More About Debt Restructuring

Debt restructuring is the process of renegotiating outstanding debt in order to avoid default. It is a tool frequently used by companies hoping to avoid bankruptcy. However, a company does not have to be at risk of total collapse to utilize it.

There are numerous ways to restructure outstanding debt:

  1. Term Extension – The creditor can agree to extend the terms of the debt, allowing more time to repay.
  2. Rate Reduction – The interest rate can be reduced in order to make monthly payments more manageable. This is sometimes known as ‘taking a haircut’.
  3. Equity Swap – The creditor can agree to cancel the debt in exchange for part ownership in the business.
  4. Bond Call – If the debt in question is represented by callable bonds, they can be redeemed early at a lower interest rate.

Each of these options has its pros and cons. Regardless, debt restructuring is not the best choice in every case. Nor is it always possible. There are times when companies face the prospect of having to pay in full or go into default.

  1. More About Hard Money

Hard money is a form of private lending based almost entirely on collateral. For example, Salt Lake City’s Actium Partners might loan to a property developer looking to purchase a commercial asset with plans to renovate and lease it. The property itself acts as collateral on the loan.

Hard money can be used as a short-term tool to settle outstanding debt. A business might secure a hard money loan with a one-year term to pay off another loan. Ownership then has a year to secure more traditional financing to pay off the hard money loan.

One of the advantages here is speed. Hard money lenders can generally approve loans within 24 to 72 hours. Interest rates are generally higher, but such a short-term often means borrowers pay less in total interest compared to what they would have paid financing the same debt over five or 10 years.

Another advantage of hard money is that the original creditor does not have to take a loss. Business owners who generally want to pay every dime they owe can still make good on outstanding debt without compromising on that commitment.

  1. No Right Answer

You have probably concluded by now that there is no right answer here. There are times when debt restructuring is the best way to go. There are other times when hard money is the better option. Businesses have to look at their own circumstances and resources to determine how to proceed. The fortunate thing is that both options are available.

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