Covenants are promises made between the business and the bank in a loan provided by the latter. When you negotiate a loan with a lending institution, the loan agreement will include both affirmative and restrictive financial covenants. It will be useful for you to work with a College Station business lawyer both to advise you when the loan is made and to help you make sure that the covenants are not breached during the life of the loan.
The lender adds covenants to a loan agreement to protect its interests. Indeed, the health of the bank depends in great part upon the integrity of the loans it makes, and these covenants are therefore an important way of protecting its own financial health. Conversely, the stronger your business is on paper, the fewer covenants may be required.
Affirmative covenants are things that a business must do during the life of the loan. For instance, your business loan may require that your company pay its taxes, maintain a positive cash flow, etc. Be prepared for the bank to monitor your debt to equity ratio, debt to asset ratio, and the net capital you have on hand.
These are promises not to engage in certain types of behaviors while paying off the loan. Most often your company will be required to refrain from taking out any other loans, particularly with a different lender.
Your business might also be in the position to negotiate covenants with the lender. This is only likely if your business is on a firm financial footing. Since the lender is taking a risk when it loans money to your company, you are only in a position to bargain if you can assure them that the risk is minimal. This can be accomplished in a number of ways:
• Develop a successful lending history with that bank. The more you work with a bank and pay off loans successfully, the more trustworthy you will become. • Have a history of credit worthiness. The bank is more likely to lend to your business if you can show a history of paying off loans, and on time. • Present the bank with a well-conceived business plan. Make sure that you include any financial statements.
You should also have an attorney monitor your company to ensure that it is complying with any covenants.
Work with an Attorney if You Are Seeking a Loan
Your College Station business attorney can both help you negotiate covenants with the bank and keep track of your business affairs to ensure that your company complies with any loan covenants. Call Peterson Law Group today to arrange a consultation at 979-703-7014 .