Loan covenant compliance a key issue for manufacturers this year

It is no secret that the credit market is tough right now. One way to make it even tougher is to fall out of compliance with your loan covenants.
RSM McGladrey
2009/01/16
These covenants — conditions that lenders place on the borrower in order for the borrower to meet the terms and conditions of the loan — can include such mandates as maintaining sufficient insurance coverage and meeting key financial performance ratios. In the current recessionary environment, those covenants may be harder to meet.
In past years, companies with loan covenant compliance issues often could get a waiver from their lender. In the current market, that is likely to be significantly harder to do. If your lender will not grant a waiver, and if you cannot line up other financing, then your auditor may not be able to sign off on your company being a going concern. So what should companies do?
Make sure you are aware of all your loan covenants, and track your results to see if any of them are likely to be an issue. If so, begin frank discussions with your lender immediately to see if a waiver or other accommodation is possible.
If your lender will not be able to continue financing, you will need to move quickly to fill that gap. Other traditional lenders are a less likely option than they have been in the past. Mezzanine or equity financing may be an option. Asset-based financing could be another. In any case, the earlier you are aware of any covenant, the more time you will have to work with your lender and investigate alternative financing if necessary.