Restructuring
Restructuring of debt is a process of debt reorganisation which is used specifically when a borrower is under major financial distress because of which they are not able to repay their loans in a timely manner. The borrowers generally use this method when they are under a grave amount of financial trouble. Debt restructuring mainly refers to the alteration of an already existing contract. It is different from debt refinancing that starts with a new piece of contract.
Restructuring mostly occurs in special situations where the borrowers are unable to carry out their debt obligations. One of the drawbacks of restructuring is that it can negatively affect the credit scores of the borrowers. This is why they use it only as a last-ditch strategy. In the debt restructuring mechanism, the borrowing party has to negotiate with the creditors so that they can create a situation where both the parties are much better off.
Lenders generally don’t want the borrowers to default because of the costs of bankruptcy. In most cases, the lenders will agree to negotiate with these borrowers to restructure their loan by means of extending payment dates, waiving late fees or changing frequencies as well as the amount for coupon payments.
Refinancing
Refinancing of Debt is a process of debt reorganisation which is used when a borrower wants to leverage their newly obtained loans with much better terms so that they can clear their previous loan. Here a borrower decides to apply for a new loan that has much better terms than their previous contract so that they can use it to clear their past obligations.
Refinancing is used in a much more liberal manner compared to restructuring as it is a swifter process with easier terms and conditions, and it also impacts the credit score positively because the payment history would always reflect the original loan as being paid off by the borrower.
There are a number of reasons for opting for the refinancing process, with the most common reason being consolidating debts, reduction in interest rates on loans, changing the loan structure as well as freeing up of cash balances. The borrowers who have high credit scores will especially benefit from this refinancing process as they can secure much favourable terms of the contract with lower interest rates.
Difference between Restructuring and Refinancing
There are major points of difference between restructuring and refinancing, and we should focus on those points below to get a wider perspective of these two instruments:
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Restructuring of debt is a process of debt reorganisation which is used specifically when a borrower is under major financial distress because of which they are not able to repay their loans in a timely manner. |
Refinancing of Debt is a process of debt reorganisation which is used when a borrower wants to leverage their newly obtained loans with much better terms so that they can clear their previous loan. |
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Debt restructuring mainly refers to the alteration of an already existing contract. |
Debt refinancing mainly refers to starting with a new piece of contract. |
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Restructuring of debt occurs under special circumstances. |
Refinancing of debt occurs under normal circumstances. |
Conclusion
There are a number of points of difference between restructuring and refinancing. But both of them perform a very crucial role in the financing of companies, both on a short and long term basis. They also have a part to play in the overall development and growth of the economy of our country, both in the short as well as the long run.
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