Navigating Loan Covenants: The Proactive Approach Business Owners Can't Afford to Ignore

By Ben Hackley, Your Trusted Fractional CFO with Over Three Decades of Expertise

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Hello Forward-Thinking Entrepreneurs,

In my extensive career spanning three decades as a fractional CFO, I've seen many businesses falter, not due to poor sales or bad market conditions, but because they failed to understand and manage their loan covenants effectively. Today, I'm pulling back the curtain on this crucial yet often overlooked aspect of business finance.?

What Are Loan Covenants?

Loan covenants are conditions or agreements between the lender and the borrower. In layman's terms, they are the "promises" you make to your lender about how you will maintain the financial health of your business. These covenants can be restrictive—dictating what you can't do—or affirmative, outlining what you must do.

The "Bite" You Didn't See Coming

If you fail to meet these covenants, it can trigger what's commonly known as a "technical default." And let me tell you, it's not just "technical" – it's a real, serious default that can lead to increased interest rates, and penalties, or even force you into immediate repayment of the entire loan amount.

Being Proactive, Not Reactive

Know Your Covenants Inside-Out

Read the fine print—then read it again. Loan documents can be tedious, but missing a critical covenant could be catastrophic for your business. Understand what each covenant requires and evaluate whether it aligns with your company's financial strategy and capacity.

Keep a Financial Calendar

Mark your calendar with the dates you'll need to meet specific financial ratios or submit financial statements to your lender. Make it a ritual to check these dates and your covenant compliance status.

Engage with Your Lender

One of the mistakes business owners make is avoiding conversations with their lender. If you foresee a potential breach, it's always better to proactively communicate this to your lender and negotiate a waiver or amendment.

Get Professional Advice

As a seasoned fractional CFO, I can't stress this enough: Engage financial professionals who can help you understand the nuances of your loan agreement, including the complex terms and ratios used in covenants.

Emergency Plan

Always have a Plan B. What will you do if you breach a covenant? Having a contingency plan can save you precious time and resources when you're in the red zone.

Wrapping Up: An Ounce of Prevention...

Loan covenants may seem like a bureaucratic hassle, but they are a linchpin in your financial stability. Being proactive about understanding and managing them can save you from the dreaded "bite" of a technical default, safeguarding both your business and your peace of mind.

If you'd like to delve deeper into managing your loan covenants effectively, or any other financial strategy tailored to your business, feel free to reach out.

Here's to your financial robustness and business success!

Ben Hackley (Fractional CFO).

Entrepreneur? Startup? Small business?

I’d love to hear about your business anytime via DM!

Reach out for expert guidance and start growing your business while eliminating the financial back-office stress and confusion.

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