What we usually see when the bank tightens a covenant
By Chris Greco, Founder and President.
When a bank tightens a covenant, the ratio drifted for two quarters before anyone calculated it. The bank's analyst calculated it. Now it is a conversation about a waiver fee and a rate bump.
Fixed-charge coverage slips when distributions rise faster than earnings. Leverage slips when equipment goes on notes. Neither shows up on a P&L, which is the only report most owners read.
Calculate every covenant quarterly, the way the loan agreement defines it, and put it on the scorecard. Call the banker before the ratio crosses the line, with a plan. Bankers forgive a covenant miss they were told about. They do not forgive surprises.
Chris Greco
Founder and President, CFO Anywhere. CFO for owner-led companies since 2002. Executive MBA, Gies College of Business, University of Illinois.
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