Strategies to Reduce a Company’s Debt-to-Capital Ratio

The debt-to-capital ratio compares a company's total debt to its total capital, debt financing, and equity. It is very similar to the debt-to-equity (D/E) ratio.

Businesses can reduce and improve debt-to-capital ratios by increasing profitability, better inventory management, and debt restructuring. These strategies show the best results when implemented together, along with an increase in the pricing of goods or services.

Increasing income

Corporations can minimize their debt-to-capital ratio by increasing sales revenues and profits. They can do so by raising procesi, generating more sales, or reducing expenses. They can pay down existing debt with these funds. 

Inventory control

You can also implement effective inventory management to reduce the debt-to-capital ratio. Inventory consumes a large portion of a company’s working capital, and companies often waste cash flow by maintaining inventory levels above what is required to fulfill client orders. You can use the day’s sales of inventory ratio (DSI) to measure how efficiently you manage your inventory. 

Debt restructuring

You can also lower the debt-to-capital ratio by restructuring debt. If a business has loans with high interest rates, it can refinance its previous debt if the current rates are lower. Refinancing the loans lowers interest costs and monthly payments, ultimately boosting the company’s bottom line profitability and cash flow while simultaneously increasing its cash reserves. Debt restructuring provides a straightforward way to negotiate better conditions for the company and its outflows.

Troubled Debt Restructuring

Distressed debt restructuring occurs when a creditor concedes a debtor that it would not typically consider. A concession can include renegotiating the conditions of a loan (ie. lowering the interest rate or principal owed or extending the maturity date) or receiving payment in a form other than cash (ie. ownership stake in the debtor). A debtor may implement debt restructuring for economic or legal reasons. A debtor has financial difficulties when hen one of the following criteria exists:

• Have not paid any of debts

• Declared bankruptcy

• Delisted securities

• Unable to collect funds from other sources

• Cannot service debt

• Skepticism about staying in business 

A debtor who can receive cash at market interest rates from sources other than the lender is unlikely to be involved in a complex debt restructuring.

Debt Restructuring 

Debt is not something to take lightly, and you should act swiftly if your organization has an excessive amount of it. This may provide the perfect opportunity for your company to consider debt repayment and restructuring strategies to help you catch up. These approaches improve your balance sheet and make loan sources available when company downturns or opportunities arise.

Debt restructuring requires accurate budget estimations and cash flow projections. You should also examine the root cause of your issues with debt to prevent it from happening in the future. This strategy requires a realistic assessment of your business, its products or services, and the discipline required to execute it.

This information may be useful when negotiating with lenders and discussing debt restructuring with others involved in the process. You should track your debt restructuring implementation procress by regularly assessing liquidity and solvency ratios and noting changes as they occur. You can also use the working capital metric to determine whether or not a company has enough assets to meet its current liabilities. 

Increasing working capital is typically a good thing. Unfortunately, it could also suggest an increase in non-cash current assets, like inventory or accounts receivable. Some people may see this as a sign of poor asset management. Once a pattern is discovered, it should be studied to further understand the underlying cause and required action. 

Four Tips for Restructuring Your Company's Debt

The process to restructure your debt looks different for each and every business. Creditors may be more willing to change payment terms and interest rates if you request a regular corporate restructure rather than an emergency. If you're dealing with a tricky corporate debt restructuring situation, you may want to hire a professional to negotiate on your behalf. However, here are some tips to help you restructure your business debt: 

1. Determine the source of the issue

You do not need to restructure all of your loans, so you should determine what specifically is preventing your business from succeeding. Do you have any high-interest loans? Do any of your vendors require immediate payment? Use these questions to determine where you can restructure to have the most significant impact. You must also come prepared to explain to the creditor why your company cannot meet the loan's current terms.

1. Calculate how much you can spend

Calculate the maximum amount that your business can put towards your debt each month. You can restructure on your own if you can pay at least 8% towards your debt, but we recommend seeking expert assistance if it is less than 8%. 

1. Draft a hardship letter 

A hardship letter is an official document that explains why you need to restructure your company’s debt arrangement. The letter should incorporate facts and financial figures to support your case. You should also be transparent and honest in the letter. 

1. Negotiate

It is in the creditor’s best interest to work with you to develop a reasonable repayment plan. If not, they will not be able to return their initial investment. You can seek out assistance from a professional debt restructuring agency if you are unsure how to approach a creditor. 

Bottom Line

Now is the best time to restructure your debt and improve cash flow for your company. Equify Financial is here to guide you through the restructuring process and help you make sound financial decisions to benefit your company. Get in touch with us today!