Debt management: The existence of debt in itself is not an indication of poor financial health for any corporate entity, since borrowing or debt creation is an established source of fund for business operations.
However, debt becomes a burden when the organisation cannot meet maturing obligations as at when due without diverting substantial proportion of her financial resources to the debt management servicing.
In order words, debt burden arises when an organization spends an unduly large proportion of her financial resources on debt servicing.
This implies that less and less of the resources of the organisation would be invested.
Consequently, the ability of the organisation to generate income will begin to drop and this scenario becomes unhealthy because the company may become unable to meet even interest payment on the debt, let alone redeeming maturity loans.
When i say debt servicing, it means the payment of interest, and when due on a loan and the eventual retirement of the loan at due date.
In the case of debt servicing, the company is required to pay interest as and when due as well as make capital repayment at due date. That is amortisation of the loan over it’s duration.
Debt Management Strategies
There are various debt management strategies or approaches that may be adopted in the management of debts so as to reduce the burden of the debt on organization.
The debt management strategies include the followings;
1. Debt servicing
Debt servicing approach is concerned with the payment of interest as and when due on a loan and the eventual repayment of the loan at due date.
This approach will only hold if the borrowing company is financially stable.
2. Debt Management Restructuring
When there is non servicing of debt, interests accumulated so much that it becomes too big for the debtor to cope with. Such a debtor may now arrange for debt restructuring.
However, the debt management restructuring will involve the conversion of debt into another debt.
3. Debt management rescheduling
The debt management rescheduling involves changing the maturity structure of the debt, by spreading it over a long period.
Here, negotiations between the creditor and the debtor aimed at revisiting the former condition of the debt such as terms of payment, interest rates etc are carried out.
The debtor under this strategy negotiates with thr creditor on the postponement of repayment of the principal and interest of maturing debts. This is to enable the debtor have enough time to generate resources to meet the debt obligation.
Its major benefits is that it allows the debtor additional time for repayment of maturing debts. This measure however, has been discovered to add to rather than reduce the debt stock since the debt and service charges would still have to be paid.
Though some experts argue that it only extends the “evil day” and for the debtor.
4. Debt Refinancing
Debt management refinancing is the procurement of a new loan by a debtor to pay off an existing debt. Technically speaking, refinancing refers to a process whereby a debtor pays off his debt with the proceeds of a new loan, with the intention that the debtor will be able to respect the repayment terms of the new loan as his revenue earning capacity improves.
5. Debt Work Out
The last debt management strategy is the debt work out, which involves the offers of a substantial discount to the debtor to pay off existing debt.
Under this arrangement, the creditor should agree to write off a certain percentage of the debt owed in return for which they should then pay the remaining balance in addition to the interest promptly when that are due.
This is what debt management is all about with it’s various strategies in the financial sector.