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Banks may be receptive to terms that further well-conceived business plan.
If you are responsible for raising capital, you are probably aware that many banks have become very strict in the arrangement of loan covenants since the collapse of the housing market. Breaching, or ?tripping,? a covenant can have a devastating effect on any business. This article explains how to negotiate fair covenants with a banker and offers suggestions on what to do if a breach is imminent.
COVENANT NEGOTIATION
It is possible to effectively negotiate with your banker, and you should understand how to appeal to the banker?s best interests. Preparation is a key element in covenant negotiation. Some finance professionals first see covenants when asked to sign the loan documents, but they have had no preliminary discussions and believe that covenants are a one-sided dictation from the bank. In general, this is not true. Although certain covenants must be expected in a commercial loan, a knowledgeable CPA should effectively negotiate fair and reasonable covenants.
Before starting any negotiation with your banker, construct a conceptual framework of any covenant types that might be especially negative to your particular business. You must have a clear idea where your strengths lie and negotiate your covenants in that direction. For example, if your business has significantly deleveraged recently but your financial projections indicate potetti tal losses for the next fiscal year, you would want to mitigate the effect of incomestatement-based covenants by expressing your concerns and suggesting a realistic cushion in the required minimum or maximum limits. If your business plan requires expansion based on a mergers-and-acquisitions strategy, you would clearly need to include this as a key point in negotiations that might include restrictive covenants.
The bank will expect to include covenants that protect its interests. However, bear in mind that banks want your business to succeed. They prefer to help businesses grow so thaL their risks remain low and more loans are requested from the bank. If the CPA can present a well-conceived business plan and suggest covenants with appropriate limits that contribute to the success of the plan, most bankets will seriously consider the proposal. You can discuss any pan of a proposed covenant in the give-and-take of a negotiation, but you must...