Why debt restructuring is a strategic lever — not just a last resort
When a Swiss SME accumulates financial or trade liabilities that exceed its ability to generate cash, debt renegotiation can prevent operational deterioration and the consequences of Art. 725b CO (over-indebtedness). Restructuring does not necessarily mean "failing": it means realigning maturities, rates and conditions to the company's realistic prospects, preserving relationships with banks, leasing companies and strategic suppliers.
In Switzerland, SMEs often face a mix of bank financing (short- and medium-term credit, overdraft facilities), convertible bonds, operating and finance leases, factoring and trade payables to suppliers. Each type of liability offers different room for manoeuvre: some lend themselves to extensions or rate reductions, others require formal agreements with additional collateral or conversion into equity.
This guide explains how to recognise early signs of liquidity stress, which restructuring tools are feasible in the Swiss context, and how to reflect contractual changes in the balance sheet in compliance with applicable accounting standards (Swiss GAAP FER or IFRS, depending on the framework adopted).
Liquidity crisis signals: what to monitor before it's too late
Liquidity often runs out gradually. Monitoring early indicators allows you to initiate renegotiation with greater credibility towards creditors, avoiding showing up when options are already limited to composition or bankruptcy proceedings.
| Indicator | Formula / reference | Warning threshold | What it signals |
|---|---|---|---|
| Current Ratio | Current assets ÷ Current liabilities | < 1.0 for multiple consecutive quarters | Inability to cover current maturities with liquid resources and receivables |
| Quick Ratio | (Cash + liquid receivables) ÷ Current liabilities | < 0.7 | Excessive reliance on inventory; risk of immediate insolvency |
| Cash Conversion Cycle | Days receivable + Days inventory − Days payable | Steadily increasing over 12 months | Working capital absorbs increasingly more liquidity |
| Interest coverage | EBIT ÷ Net finance costs | < 2.0 or declining | Operating margin insufficient to support debt cost |
| Net debt / EBITDA | (Financial debt − cash) ÷ EBITDA | > 4.0 (varies by sector) | High leverage relative to operating cash generation |
| Bank overdraft | Average utilisation vs approved limit | > 80% for more than 60 days | Structural dependence on short-term credit |
| Average supplier payment days | (Trade payables ÷ purchases) × 365 | Beyond contractual terms (+15 days) | Implicit supplier financing; supply chain disruption risk |
Beyond quantitative ratios, pay attention to qualitative signals: refusal of new credit lines, increased collateral requirements, downgrade of internal bank rating, recurring payment reminders, systematic partial payments and difficulty meeting contractual covenants (debt/equity ratio, minimum equity, minimum EBITDA).
Restructuring tools: a concise overview
The choice of tool depends on the severity of the situation, the number of creditors involved and the likelihood of operational recovery. Here is a comparison of the main approaches available to a Swiss SME:
| Tool | Scope | Advantages | Limitations |
|---|---|---|---|
| Bilateral renegotiation | Single creditor (bank, leasing) | Fast, confidential, low cost | Requires creditor trust; limited effect if multiple liabilities exist |
| Standstill agreement | Temporary suspension of payments | Buys time for a turnaround plan | Does not reduce debt; requires a credible plan by expiry |
| Debt rescheduling | Extension of maturities and/or rate reduction | Aligns repayment flows with operating cash | Increases total interest cost if duration is extended |
| Debt-to-equity conversion | Shift from liability to equity | Strengthens equity; reduces finance costs | Shareholder dilution; possible deferred tax loss |
| Partial debt-for-equity swap | Portion of debt converted, remainder renegotiated | Compromise between balance sheet turnaround and debt continuity | Legal and valuation complexity |
| Supplier agreement | Trade payables | Improves short-term liquidity without bank intermediation | Reputational risk; possible supply disruption |
| Composition / Nachlassvertrag (Art. 314 DEBA) | All creditors, court procedure | Binding on all creditors if approved | Cost, time, public visibility; approval not guaranteed |
| Composition moratorium (Art. 293 ff. DEBA) | Temporary suspension of enforcement proceedings | Temporarily protects from attachments | Initial max. 4 months (extendable up to 8 months); does not eliminate debt |
Renegotiating liabilities: banks, leasing and suppliers
Each category of creditor requires a different approach and documentation. Preparing a solid dossier significantly increases the likelihood of success.
Bank financing
Present the bank with a turnaround plan including 12–24 month cash projections, highlighting the structural causes of the problem (revenue decline, failed investment, collection delays) and corrective measures already taken (cost reduction, sale of non-strategic assets).
Swiss banks assess future repayment capacity more than historical financial statements. Possible outcomes: extension of medium-term credit, partial conversion into subordinated loan, rate reduction in exchange for additional collateral (mortgage, pledge on receivables, shareholder guarantee) or consent to a temporary covenant waiver.
Leasing and trade credit
Operating lease contracts offer limited scope for renegotiation, but a finance lease can be restructured with extension of the amortisation schedule or reduced early buyout. Review early termination clauses and exit costs.
With strategic suppliers, transparency is essential: proposing a gradual repayment plan (e.g. 70% within 30 days, balance in 3 monthly instalments) is often preferable to silent non-payment. Document every agreement in writing, even by e-mail with explicit confirmation, to avoid future disputes over VAT and tax deductibility.
Elements of a credible restructuring plan
- 1.Updated balance sheet analysis (interim statement of financial position and monthly cash flow statement)
- 2.Identification of liabilities by priority: secured, privileged, unsecured, subordinated
- 3.Concrete proposal for each creditor: amount, maturities, possible principal reduction or conversion
- 4.Operational turnaround measures: fixed cost reduction, working capital optimisation, possible shareholder contribution
- 5.Realistic timeline with verifiable milestones and periodic reporting to creditors
Balance sheet impact: how to account for restructuring
Changes to debt terms have accounting effects that must be analysed case by case. Treatment depends on the accounting framework adopted (Swiss GAAP FER or IFRS) and the nature of the restructuring.
Renegotiation without principal reduction. If only maturities or interest rates are modified, the debt remains recorded at carrying amount. Future interest is accounted for according to the renegotiated schedule. Any restructuring costs (legal fees, advisory services) should be capitalised only if they generate an identifiable future economic benefit; otherwise they are charged directly to the income statement.
Debt forgiveness or principal reduction. When a creditor waives part of the principal owed, the difference between carrying amount and amount actually owed generates extraordinary income (income statement) or, if restructuring occurs in a context of financial distress with multiple creditors, it may be necessary to assess whether composition provisions apply and whether provisions for restructuring costs should be recognised.
Debt-to-equity conversion. The extinguished debt is removed from liabilities; the countervalue is recorded as equity (or as a conversion reserve, depending on corporate structure). No income statement gain arises, but equity increases — relevant for Art. 725a CO (capital loss) and Art. 725b CO (over-indebtedness).
Subordinated and quasi-equity loans. Subordinated and deeply subordinated loans may, in certain circumstances, be treated as a quasi-equity component in the over-indebtedness calculation under Art. 725b CO para. 4, if there is a written commitment from creditors to grant deferrals and to rank behind other creditors for an amount at least equal to the excess. This aspect must be explicitly agreed with the subordinating creditor and documented for the auditor.
| Transaction | Statement of financial position | Income statement |
|---|---|---|
| Maturity extension | Short/long-term reclassification if > 12 months | No immediate effect |
| Interest rate reduction | Debt unchanged at carrying amount | Lower future finance costs |
| Partial principal forgiveness | Reduction in financial liabilities | Extraordinary income from debt forgiveness |
| Conversion to equity | − Debt / + Equity | No effect on profit or loss |
| Provision for restructuring costs | + Provisions / − Equity | − Profit or loss (restructuring costs) |
Legal obligations: Art. 725a and 725b CO
Swiss company law imposes stringent obligations on management bodies when equity is reduced or when the company is over-indebted. Ignoring these obligations exposes directors and managers to personal liability for damage caused to creditors.
Art. 725a CO — Capital loss. If the latest annual accounts show that assets, net of liabilities, no longer cover half of share capital and legal reserves (AG) or capital and legal reserves (GmbH), the board of directors must adopt measures to eliminate the capital loss and, if necessary, propose further turnaround measures to the general meeting (recapitalisation, capital reduction, dissolution or other solutions). Debt restructuring with conversion into equity or shareholder contributions is among the typical measures.
Art. 725b CO — Over-indebtedness. If there is justified concern that the company's debts are no longer covered by its assets, the board must prepare interim accounts (going-concern value and, where necessary, liquidation value) and have them audited. If both sets of accounts show over-indebtedness, the corporate bodies must notify the court, unless creditors subordinate their claims for an amount at least equal to the excess (Art. 725b para. 4 CO) or there are well-founded prospects of eliminating it within 90 days. Effective restructuring, completed before reaching this threshold, is the most effective way to avoid public proceedings.
Caution: payments in a situation of over-indebtedness
Making selective payments to individual creditors in the presence of over-indebtedness may constitute a breach of the duty of care (Art. 754 CO) and, in certain cases, mismanagement (Art. 158 SCC), in addition to possible voidability of the acts (Art. 288 DEBA). During a crisis, every payment should be assessed within the overall restructuring plan, preferably with legal advice.
Seven-step operational plan
Balance sheet and liquidity diagnosis
Extract interim statement of financial position, 13-week weekly cash flow plan and calculate liquidity ratios. Identify critical maturities in the next 90 days.
Liability mapping
List every debt with outstanding amount, maturity, rate, collateral, covenants and ranking. Distinguish financial, trade, tax and employee liabilities.
Definition of turnaround target
Establish how much debt must be restructured, converted or repaid to restore an acceptable current ratio and comply with the capital loss threshold under Art. 725a CO.
Negotiation with creditors
Initiate contact starting with strategic creditors and secured liabilities. Present the plan uniformly to all creditors of the same class to avoid accusations of preferential treatment.
Formalisation of agreements
Draft contractual addenda, subordination agreements or notarial deeds for equity conversions. Review tax impact: debt forgiveness may create taxable income; conversion to equity affects equity and reserves.
Accounting entries and disclosure
Record the changes, update short/long-term reclassification, assess the need for notes on going concern and events after the reporting date.
Monitoring and reporting
Implement monthly liquidity and equity reporting. Tools such as Accountex facilitate tracking of liability maturities, bank reconciliation and generation of reports for creditors and auditors in real time.
Acting early makes the difference
Debt restructuring is most effective when initiated at the first sign of liquidity stress, not when equity is already negative. A credible plan, supported by up-to-date accounting data and realistic cash projections, keeps the door open for negotiation with banks and suppliers.
From an accounting perspective, every change to liabilities must be handled precisely: reclassifications, gains from forgiveness, conversions to equity and provisions have direct effects on the balance sheet and compliance with legal obligations. Orderly digital accounting — with a liability schedule, monitored cash flow and interim statements generated quickly — is the operational foundation on which to build any debt turnaround plan.
If in doubt about the existence of over-indebtedness or the feasibility of a restructuring, consult a fiduciary or insolvency lawyer promptly: the cost of preventive advice is incomparably lower than that of an unplanned insolvency proceeding.