If you have a line of credit or a term loan with a bank, chances are your loan agreement contains various covenants. There are generally three types:
- Affirmative covenants, which require you to adhere to the provisions of the loan agreement and provide your lender with certain information, such as tax returns or financial statements. Your lender may require your financial statements to be prepared, compiled, reviewed, or even audited by an independent certified public accountant.
- Negative covenants, which prohibit certain actions, such as incurring additional debt or paying dividends.
- Financial covenants, which can require your company to maintain specified levels of liquidity, working capital, net worth, debt to net worth, or debt service coverage, among others.
Depending on how often your covenants are reviewed and measured by the bank (e.g., quarterly or annually), you’ll want to review each of them to make sure you are or will be in compliance. If it seems as if you may not meet one or more of your covenants, you should review or develop financial projections to determine if steps can be taken proactively to remedy the situation, such as paying down liabilities, accelerating collections from customers, or shifting the date of future fixed asset purchases. If you have missed a covenant, you should reach out to your loan officer as soon as possible to determine what steps can be taken to cure the violation, including requesting a waiver of the covenant(s).
If you have questions about your loan covenants or need financial statements or tax returns prepared to comply with your loan covenants, contact Edwards, Ellis &
Associates, P.C..
