Matt G. Lamoreaux in a Journal of Accountancy Article says ‘Loan Covenants Tighten Up‘. Here are his suggestions for what a business should take a look at before talking to their lender. He was joined in the conversation by Sam Thacker of consulting firm Business Finance Solutions.
- Negotiate and monitor ratios
- Know what ratios your bank cares about
- Compare yours to RMA or other industry standards
- Monitor them closely
- Prepare to be audited
- [Linda’s note: Especially if you want the banker to consider an improving 2009 financial statement with a poor performance on the 2008 tax return.]
- Watch out for positive cashflow covenant
- Especially if your operating cycle is longer than 90 days
- Get ready for new rate structures
- Libor instead of Prime?
- Be prepared for more stringent guarantees
- Some banks are requiring owner guarantees of 5% owners, down from 20% owners
- Know what is typical
- [Linda’s note: It is hard to negotiate when you do not know what other lenders would require.]
Now is a good time to have a good relationship with your lender, if the lender is in good shape.
- In what ways are loan covenants tightening up at your lending institution?
- How flexible are you if the borrower misses a covenant?