Debt consolidation is a necessary process since it signals the performance of the company in the stock market. It is all the more important to undertake debt consolidation if the company has public participation through way of securities and debentures. Debt consolidation is also necessary to keep the company clear from falling into a debt trap. It could mean the end of the road for the company as well as the share holders who have made significant investments in the company anticipating good returns.
Debt consolidation comes into play whenever a company has borrowed funds from a public institution or a bank for its day to day operations. Debt is also acquired to be engaged in the working capital. However, companies should make prompt repayments of the debts to maintain a clean balance sheet. In fact, it will be better if the company maintains a separate debt servicing unit within the company to take care of the company's debt burden. The debt consolidation happens through various stages.
If a particular company has borrowed debts and has reached a stage wherein repayments become a problem, then debt consolidation becomes necessary. For this, the company has to appoint noted tax consultants, who can provide guidance to the company and manage its finance effectively. The consultants' first job will be to find out banks or institutions that are willing to take over the debts of the company. The negotiations of taking over the debts could take more than six months. But once the bank agrees to take over the debt of a company, it is only a matter of days when the debt consolidation is finalized. The bank agrees to take over the debt by clearing the debts of the company with the previous bank. All the liabilities of the company will be transferred to the bank that has agreed to take over the debts. It could also mean that the bank that had provided the loan initially to the company effectively terminated its relationship with the company.
Once a new bank takes over the debt, its first job will be to assess the financial condition of the company. The bank would have agreed to take over the debt for an additional interest rate. The bank stands to gain from the fact that it has found a new customer at a higher interest rate. However, it makes sure that its investments, in the form of the loan to the company, are safe by appointing one if its representatives in the management or the board level of the company. Subsequently, all key investment decisions have to be approved by this representative in consultation with the bank. This process is called debt consolidation. The bank's representative will be on the company's board as long as the company is in the red. The representative's mandate will be to turn around the company at the earliest by bringing it in the profit making mode. The debt consolidation method is employed by many companies to ensure its survival through difficult times.
