Financial Literacy
Contents:
How to restructure debt
How to structure an offering
How to raise capital
Understanding your market
1 – How to restructure debt
Restructuring normally is accomplished in three ways: via an ‘extension,’ a ‘composition,’ or a ‘debt-for-equity swap.’
‘Extension’ - An extension occurs when creditors agree to lengthen the debtor firm’s repayment period. Creditors often agree to suspend temporarily both interest and principal repayments.
‘Composition’ - A composition is an agreement in which creditors agree to receive less than the full amount they are owed.
‘Debt-for-Equity Swap’ - A debt-for –equity swap occurs when creditors surrender a portion of their claims in exchange for an ownership position in the firm. Such actions increase the likelihood a debtor firm will survive.
The debt restructuring process typically involves getting lenders to agree to reduce the interest rates on loans, extend the dates when the company's liabilities are due to be paid, or both. These steps improve the company's chances of paying back its obligations and staying in business.
How do you calculate debt restructuring?
Divide the total weighted loan balance by the total amount of debt outstanding, and then multiply the result by 100.
Three things that business owners can do to improve cash flow and make it easier to make payments on time:
Refinance: replace an existing loan with a new loan that pays off the debt of the first one.
Consolidate: consolidate multiple debts under a single loan to make it simpler to repay your debt.
Restructure: review your existing debt and work out more favorable repayment terms with your existing creditors.
Debt restructuring is a process used by companies, individuals, and even countries to avoid the risk of defaulting on their existing debts, such as by negotiating lower interest rates. Debt restructuring provides a less expensive alternative to bankruptcy when a debtor is in financial turmoil, and it can work to the benefit of both borrower and lender.
A company seeking to restructure its debt might also renegotiate with its bondholders to "take a haircut"—meaning that a portion of the outstanding interest payments will be written off or a portion of the balance will not be repaid.
A company will often issue callable bonds to protect itself from a situation in which it can't make its interest payments. A bond with a callable feature can be redeemed early by the issuer in times of decreasing interest rates. This allows the issuer to restructure debt in the future because the existing debt can be replaced with new debt at a lower interest rate.
What Is a Haircut?
In finance, a haircut has two meanings. A haircut is most commonly used when referencing the percentage difference between an asset's market value and the amount that can be used as collateral for a loan. There is a difference between these values because market prices change over time, and the lender factors this fluctuation into their valuation and analysis for risk mitigation.
For example, if a person needs a £10,000 loan and wants to use their £10,000 stock portfolio as collateral, the bank is more likely to recognize the £10,000 portfolio as worth only £5,000 in collateral. The £5,000 or 50% reduction in the asset's value, for collateral purposes, is called the haircut. Should the person's stock portfolio decline in value, they may still have sufficient collateral for the amount of debt issued.
What Is a Callable Bond?
Normally, a bond is a very simple investment instrument. It pays interest until expiration and has a single, fixed life span. It is predictable, plain, and safe. On the other hand, the callable bond can be seen as the exciting, slightly dangerous cousin of the standard bond.
Callable bonds have a "double life." They are more complex than standard bonds and require more attention from investors. In this article, we'll look at the differences between standard bonds and callable bonds. We then explore whether callable bonds are right for your investment portfolio.
What Is Corporate Debt Restructuring?
Corporate debt restructuring is the reorganization of a distressed company's outstanding obligations to restore its liquidity and keep it in business. It is often achieved by way of negotiation between distressed companies and their creditors, such as banks and other financial institutions, by reducing the total amount of debt the company has, and also by decreasing the interest rate it pays while increasing the period of time it has to pay the obligation back.
Occasionally, some of a company's debt may be forgiven by creditors in exchange for an equity position in the company. Such arrangements, which often are the final opportunity for a distressed company, are preferable to a more complicated and expensive bankruptcy.
Here are some of the key steps you need to take when debt restructuring for a small business:
Step 1 – Pinpoint the problem
Common issues include low sales, relative to cost, undercapitalisation, straying away from a financial plan, or high overheads. Identifying this can help save money in the future.
Step 2 – Hardship letter
A creditor may require this alongside some kind of agreement for paying them back. It’s important to be open, honest and personable, along with providing evidence if required.
Step 3 – Planning a budget
Planning a monthly budget of what can realistically be paid back is essential. If you can only manage to pay back under 10% of the debt, there’s always the option of seeking professional help. In any case, if you are not financially minded it would be helpful at this point to seek the advice of your accountant or Independent Financial Advisor.
Step 4 – Consider a debt restructuring firm
If this all seems overwhelming, and the debt feels unmanageable, hiring a professional may be a suitable option. After providing certain information, a firm should create an in-depth plan based on the debtor’s budget and creditor’s cooperation.
2 – How to structure an offering
The most important thing you need to do in a business or online project is first to define what the offer is and what the products and/or services are. This is fundamental not only to organise the digital marketing strategy. Digital marketing aims to sell something to someone. The thing that it aims to sell is products and/ or services (physical or in other forms). However, this offer needs organisation.
An important aspect of this is to structure your value-ladder. Defining your value-ladder is important because it will allow you to increase your lifetime customer value. In other words, you need to define what the upsell structure of your business is.
A value ladder is a sales funnel designed to improve your sales process’s efficiency. There are many types of sales funnels to bring leads into your online business, but the most effective is a value ladder. A value ladder can help you gain customers and help you grow your business.
For many companies, generating additional revenue from current customers is more efficient than generating new revenue from new customers. It’s also healthy from a business perspective, as increasing upsells also increases your customer LTV (Life Time Value), which in turn, improves cost efficiencies across the board. Upselling happens when you promote add-on items to a customer that’s about to purchase, usually at a higher cost.
If you want to increase your revenue, you need to write down what your products are and what you can offer on top of those products.
The breakdown:
Lead Magnets are usually freebies (coupons, videos, checklists, etc.) that attract and qualify leads
Initial Offers are lower-end products/services that are ideally “too good to refuse” and get people in the door
1st Tier Offers are usually your core product or service and bring in about 80% of your sales
2nd Tier Offers are the “next” level up from the 1st tier
Top Tier Offers are the best you have to offer
Service-based businesses differ from e-commerce businesses; broadly speaking, one can distinguish 4 main categories of services – digital products, coaching, consulting and services/masterminds.
Structuring your offering correctly can be vital to the success of your business. If you charge too much, you risk scaring customers away — charge too little, and you cheat yourself. Too many plan options confuse customers, while too few limits your market. A great method to use is a tiered offering. The Silver, Gold, and Platinum approach.
The tiered program structure plays on human psychology. Most customers hate being perceived as cheapskates, but at the same time, they have a budget in mind. The goal is that the majority of your clients will land in the middle tier, while still leaving options for those who don’t. Pricing of these tiers would be dependent on the products or services you providing, and should be tiered accordingly.
3 – How to raise capital
There are many ways to raise capital, depending on the purpose for the capital and how much capital is needed for your venture. Examples include the following:
Bootstrapping
Family and Friends
Non-Cash Bartering
Finding a Partner
Fundraising Campaign
Getting Qualified for Grants
Loans
Seek Out Investors
Corporate Sponsorships
What is bootstrapping?
The most common way that entrepreneurs raise capital to fund their business ventures is by bootstrapping their way to success. Some ways to bootstrap include tapping into personal savings, getting all your friends to pay you the money they owe you, borrowing funds from a retirement savings plan, selling things of value, and putting some expenses on low interest credit cards.
Why family and friends?
This is a traditional way of raising capital for a business, but it’s still effective if you have a support system around you that believes in you. Friends and family can be great sources of not only start-up capital, but also long-term capital.
What is non-cash bartering?
Another way of increasing your capital is to barter for some of the things that you need. No cash is ever exchanged, but set up a simple written agreement and go from there. Types of bartering can include equipment trades, office shares in exchange for answering the phones on certain days, and even borrowing a vehicle in trade for something you can offer in return.
Why find a partner?
A similar arrangement and way to increase capital is to accept support from a partner. Combining resources and funds can help more than one business to thrive. Entrepreneurial partnerships are popular and can work out fantastically as long as both parties know what they are getting into, agree to the terms, and put in their fair share of the work. There can be various types of partnerships too, which makes them adaptable. Some partners prefer to stay on as an advisor in the background, whereas, others take a more active role and share their ideas about the business direction.
What is a fundraising campaign?
Thanks to the internet, it’s no longer necessary to shake down your friends and family members for the capital you need to start a business. Instead you can ask strangers to fund your dreams. From micro-loans to crowdfunding, there are many avenues for raising capital. Seek out crowdfunding companies that have good reputations, reasonable fees, and a high rate of return. Study some of the campaigns of the top funded ideas and learn from them.
What are qualified grants?
A more traditional way of raising business capital is to seek out funding through a variety of grant and loan sources. There are many grant programs for disadvantaged and minority business owners, as well as free programs to train you on how to start and grow a business. With grants, you must meet specific criteria, must detail how the funds are to be used, and many fall within high growth areas like STEM industries.
How may loans help?
One of the best ways to obtain a business loan is by asking at the bank or credit union you already do business with. Check out rates online and then apply for loans with the lowest interest rates and easiest repayment terms. There are also banks that operate solely online and have no brick and mortar location. Because they keep their overhead down, they can approve business and personal loans faster.
What are the types of investors?
There are two types of investors you may be interested in approaching as an entrepreneur. An Angel Investor has a boatload of cash, but wants to remain silent in exchange for partial ownership of the business. You still have the say over what happens, but you must generate healthy revenues or risk losing this investor’s support. The other type of investor is a Venture Capitalist who normally seeks out established businesses that have a track record of growth and projections to continue this growth. Business owners present their ideas and financial estimates to potential VCs and then hope they get the best offer.
What are corporate sponsorships?
A corporate sponsorship is a form of marketing in which a company pays for the right to be associated with a project or program. Corporations may have their logos and brand names displayed alongside of the organization undertaking the project or program, with specific mention that the corporation has provided funding. Corporate sponsorships are a tool used to form brand identity and brand image via increased visibility. While supporting a popular and socially conscious cause may be mutually beneficial to both parties, a corporate sponsorship is not a donation; it is a business deal.
4 – Understanding your market
Market research is an important step when deciding to start a business. Before you decide to invest your money and start a business you need to understand your products and services, whether there is a market for them, and whether your ideas are viable in the first place. Extensive market research can help you determine the starting capital you will need for your specific business.
What can market research do for you?
Market research will highlight how much competitors are willing to spend on your products and services and give you a good idea whether the profit margin would be high enough to make your business successful. As part of the market research should identify your target audience along with the market opportunities which could help you establish your business more efficiently. The size of your target customer base will give you an insight into your growth potential. If it is too small then your business idea may not be viable, but if it is too big, although you will have room to grow, the market may already have lots of competitors.
Understanding your position in the market is an important aspect of running a successful business. Knowing where your threat and opportunities are, enables you to protect your business and steer your growth strategy in the right direction. A good way of determining your current position in the market is by conducting business analyses, such as SWOT (Strengths, Weaknesses, Opportunities & Threats) and PEST (Political, Economic, Social & Technological). On top of this research, regularly compare yourself to your biggest competitors, so you are able to react faster to any changes to the market. Competitors will have a large influence on your market positioning.
(A collection of thoughts and information to help you build perspective and understanding)
Daniel Quinn – October 27, 2022