Many companies raise funds by incurring debt of one sort or another. This might take the form of bank facilities, bond issuances or simply delaying payment to suppliers to improve the company's working capital position.

Before the credit crunch, deep liquidity in the banking and capital markets meant that debt incurrence was cheap and relatively easy. The two main differences between debt and equity capital are that debt (a) must be repaid by an agreed date; and (b) as a general rule, must be serviced regularly by way of interest payments.

Pre-crunch, any company approaching the maturity of a particular debt instrument could be confident of refinancing via another debt instrument with the same (or different) lenders. In a rising market, it could run a competitive process to achieve the very best terms available at the time. The other main method by which debt might be repaid is via an exit - from the proceeds of a sale or flotation. With the availability of debt greatly reduced and the markets slowly recovering from the shocks to date, this isn't the best time to sell or to float.

Post-crunch, companies are finding refinancing much more difficult. Aside from an unwillingness or inability to lend new money, banks (either on an individual basis or together as part of a syndicated loan) are reluctant to lend as much to any particular company as they might have done before. Hence refinancing proceeds may not be sufficient to repay all of the existing debt. In these circumstances, fresh equity may be needed to fill the funding gap.

The consequences of failing to resolve this conundrum are dire. When the debt reaches maturity, non-payment may bring insolvency; unless the lenders are willing to enter into a contractual "standstill" arrangement, whereby their rights may be temporarily suspended while a restructuring of the debt (perhaps involving a debt for equity swap) is considered and perhaps implemented.

As a result, companies are looking beyond the short term for any upcoming debt maturities. Rather than allowing things to go to the wire, some are approaching banks to negotiate "forward start" facilities which kick in on the maturity of the existing debt, but are negotiated and signed now while the company remains healthy.

In return for this comfort - that refinancing risk has been mitigated - the company will be willing to pay an enhanced interest rate at the (now increased) market rate on its existing debt, during the period prior to debt maturity.

It is becoming clear that good businesses with bad balance sheets ought to survive the downturn: perhaps via refinancing, raising fresh equity, restructuring or a combination thereof. Bad businesses with bad balance sheets will struggle to survive and many have already failed.

Simon Johnson is a partner in the finance practice group of Freshfields Bruckhaus Deringer.