Here are the steps we have covered so far:
STEP ONE: Be sure to know your debt situation
STEP TWO: Be cautious as revenue improves
STEP THREE: Don’t (necessarily) Pay Down all the Debt
Of the six steps to digging out of business debt, STEP FOUR can be
the most painful. Remember when you were a kid? If you did something
wrong, I bet it went better for you if you told Dad before he found
Well, your lender is not your father. But when it comes to the
conversation about not keeping your promises, it might just feel that
And what promises might those be? The promises a business makes to
the lender certainly include the promise to pay back the loan. And
there is another set of promises, called loan covenants.
A loan covenant is a condition that the borrower must comply with in order to
adhere to the terms in the loan agreement. If the borrower does not
act in accordance with the covenants, the loan can be considered in
default and the lender has the right to demand payment (usually in
Here are some of the loan covenants you might have agreed to:
- Maintain (adequate) insurance for property, collateral and life insurance on key employees
- Pay taxes / fees / licenses on time
- Provide periodic financial information on borrower and guarantor
- Maintain minimum liquidity, profitablity and equite as evidenced by financial ratios
- Promise not to change management or merge/acquire another company without approval
- Obtain prior approval from the lender to take out additional loans
- Limit owner withdrawals/dividends/distributions to agreed levels
Be sure you know what promises you have made. If there is any possibility you won’t be able to keep the promises, call your lender before you default.
Be prepared to explain your situation and what you plan to do to remedy the situation.
In our next post on Step Five I’ll tell you why you might want to invite your lender over for tea.