Simply put, a Business Debt Consultant is a professional that helps corporations in managing their existing debt. They can work independently, for a government subsidiary, or for a private agency. The end goal of a debt consultant is to restore liquidity and attain the financial stability of an organization.
In the United States, filing bankruptcy costs a minimum of $50,000, and very often, that amount exceeds $100,000. Indeed, it is exorbitant for a company to file for bankruptcy in an event of financial disaster.
On the other hand, lenders avoid forcing bankruptcy on their debtors because often, it results in the recovery of finances by negotiating with a debt consultant.
The reasons that motivate an organization to seek a business debt consultant include:
Ø Skipping contract payments
Ø Defaulting on debt payments and the interests
Ø Intense debt load
- Violation of agreement with the creditors
What is the core approach of a business debt consultant?
In a nutshell, a debt consultant begins by assessing the debt situation of the organization and getting a clear picture of the financial situation. This may involve analyzing the net flow of cash in the organization, identifying priority payments that are held past due, outstanding debt, and overall debt of the company.
Next, the consultant comes up with possible strategies that could be incorporated in the light of the existing situation. The methods are discussed with the client, and a suitable plan of action is agreed upon.
Finally, the plan is implemented by the debt consultant that acts as a mediator between the lender and debtor and negotiates with the creditor to acquire flexible payment plans. In addition, a consultant may also devise monthly plans and budgets, liaise with the businesses in legal proceedings and court hearings, and undertake the paperwork pertaining to the debt management.
It must be noted that debt consultants could charge fees that might look burdensome to bear, and companies might skip on hiring a consultant and proceed to restructure themselves. However, it is unadvised because according to an IMF report, corporate debt restructuring eventually pays off.
What skills are necessary in order to be a good debt consultant?
- Excellent verbal and written communication
- Ability to get around administrative challenges
- Decent skills in computer software and data analysis tools
- Good listening skills and high emotional intelligence
- Precocity in negotiation with the creditors
- Discipline— in terms of meeting the deadlines
- Sensitivity on client’s confidentiality
- Decent experience and a reputable name in the field of debt consultancy
Methods of Debt Management
After analyzing the debt situation of the organization, the debt consultant devises one of the following strategies to deal with the debt situation of the company.
Diminish Debt Payments
One of the most common approaches to business debt restructuring is to persuade the creditor in lowering the interest rates on return.
A flexible payment plan is acquired by the consultant, and interest rates are negotiated till it gets feasible for both parties. This provides relaxation to the businesses since the consultant sheds their instantaneous burden of debt. On the contrary, the creditor often capitalizes on the situation by lengthening the duration of the debt, in case of an installment plan; hence, a win-win situation is established.
Sometimes organizations come across game-changing financial disasters, and it gets next to impossible for them to continue debt payments. On the other hand, creditors don’t seek to get the company file for bankruptcy because it doesn’t provide a viable solution to make up for the massive debts and remaining assets.
In this situation, a debt consultant considers getting the exemption of debt from the creditor by offering it equity in the company. This means, that the creditor gets a share in the ownership of the organization—not a bad option for the creditors at last.
Figure 1 Total Debt to Equity Ratio in the US
Take a Haircut
When a lender offers a loan, collateral is established in terms of securities and assets for the times when businesses default. The assets are liquidated so that some, if not all, of the debt is recovered. In scenarios when the market price of an asset falls down, a haircut is established that makes up for the percentage reduction in the market value of the asset.
A debt consultant sometimes considers “Taking the haircut” as a potential way-out for the debt crises. By achieving this, the debt burden diminishes, and this strategy is then accompanied by other plans to take the debt burden off companies.
Sometimes it is not a feasible option for the businesses to pay their debts in full. Therefore, a debt consultant steps in to negotiate with a creditor and achieves an installment option for the debtor. Consequently, the businesses clear their debts in scheduled installment plans instead of clearing it in one go.
Other times, the consultants make the businesses capitalize on the callable bonds (if applicable) to restructure the debt.
The Red Flags of a Malicious Debt Consultant
Like in many other professions, a deceptive debt consultant imparts trickery to lay plans that end up as scams in the future. On the other hand, a substandard consultant does not realistically analyze the financial position of the companies and fails to carry out a methodological approach to restore their liquidity.
During the liaison with the debt consultants, consider it a red flag when a consultant:
- Asks for fees even when he or she works through an agency that runs on charity-principle
- Doesn’t provide evidence of the authenticity in the form of documentation
- Asks the organization to sign for a particular strategy without carrying out any analyses
- Forces the company not to contact with the creditor directly
- Doesn’t establish transparency between lender and debtor during the negotiations
Now that you have achieved an insight on a good business debt consultant, your part is equally essential to get your business back on track. In particular, you should be willing to coordinate honestly and as openly as possible—especially when it comes to declaring assets and liabilities.
Moreover, if a monthly budget or a particular financial plan is made by your consultant, sticking to it diligently would always be in the best interest of the organization.