At MCDA CCG our finance experts have over 80 years of client experience and inevitably, we have had clients that violated a bank covenant. Our advice is alway to be proactive and upfront and avoid having to be reactive.
Bankers Hate Surprises
Bankers are looking for clarity, certainty, and more importantly, communication! Their job is managing risk and mitigating risk at the same time. As in all healthy relationships, honesty is the best policy. Your banker doesn’t like surprises and will eventually find out everything, so you might as well take a proactive approach and take action sooner rather than later.
First, don’t panic but prepare before contacting your bank. My advice to clients is to calculate the covenant violation and determine (if possible) when they are most likely able to be back in compliance. Prepare projections going out two years in a monthly format, as it will aid in your discussions. You can also take a 13-week cash flow projection if a shorter time frame works for your situation. A 13-week cash flow is a popular report as it shows where your company is trending in the short run. Now, reach out to your bank and request a meeting with your banker. This will build trust, credibility, and earn you some respect from your banker.
Open the Lines of Communication
When you meet with your banker and any other representatives present, ask them to either waive the covenant for a period of time, allowing you to get back into compliance. Or, if your projections show that it is going to be a while (next fiscal year), ask your banker to reset the covenant so that the violation doesn’t continually show that you are out of compliance with your bank covenants on year-end financial statements. In addition, set up quarterly meetings with your banker, show your banker that you are taking this violation seriously. Utilize this time to show your banker what you are doing to correct the situation by providing quarterly financial statements along with commentary. Be detailed and be precise with your reporting going forward building additional trust with your banker.
Plan “B” Options
Having options is always a positive thing. Establish a plan “B” by meeting with a few new banks each year and know which ones fit what your business needs. If your current bank has a crazy knee-jerk reaction to your covenant violation, you are prepared to take the next steps. As bank personnel has turnover, banks credit culture will shift. The relationship you have with your banker is critical. This will show relevant when things get rough. Bankers will fall in love with you and your business when things are going well, but in all things in life, relationships are tested when there is a downturn or negative impact on your business or even the economy.
If you are in violation with a bank covenant and are having difficulties with your bank, please reach out to us. We would love to help you out and we understand the emotional aspect from each side. We will assist you in bank communication and help you prepare to get back on track sooner rather than later. You can reach out directly (714)872-2393 or email us at firstname.lastname@example.org.