My Experience with Commercial Loan Covenant Negotiation
In my experience as a debt advisor, I’ve seen many cases where loan covenant breaches have caused irreparable financial damage to a business. And breaches often take borrowers by complete surprise.
You need funding that helps, not hurts, your business. So be sure to have your counsel and your debt advisor review your loan covenants before you sign.
Careful review gives you a better chance of negotiating more favorable covenant terms, or to find alternative sources of funding.
The Right Way to Approach Loan Covenants & When to Negotiate
Let’s take a look at Robert – a business owner who was smart about looking at his loan terms & conditions in detail before signing on the dotted line.
Robert owns a profitable manufacturing firm and successfully negotiated with a local bank for additional growth financing.
He sent the bank’s term sheet, which outlined the interest rate and maturity and the main terms and conditions, to his legal counsel for review. Everything looked pretty good.
Then came the loan documents (87 pages) which contained even more detailed terms and conditions.
Robert’s counsel had concerns.
Many of the terms and conditions seemed to give the lender unwarranted and unusual control over the business if a condition or covenant were breached.
Robert and his counsel weighed the benefits of this critical new financing against the potential to lose control.
What if there was a seasonal or other temporary downturn in company performance? Would the lender impede or prevent a recovery based on a covenant breach?
Robert needed financing to grow, but he began to question whether this loan would support the company’s long term goals.
This is the loan review process that every borrow
