I am going to breach a financial covenant at the end of the month – What should I do?
Communicate with your bank as soon as possible, but you need to be prepared. You will want to have an explanation for the cause of the upcoming breach. Ideally you would have a good idea of what levels you can comply with – or tell the bank you are working on new projections and give them a date that you will be prepared to discuss a path forward. The lender is likely to ask you about your liquidity needs, so you should prepare a cash flow forecast (13-weeks is standard). All projections/forecasts should be as realistic as possible as you will quickly lose credibility with the bank if you continually revise downward. If your circumstances prevent any reasonable level of forecasting (e.g., you are completely shut down and not sure when you can reopen), you may want to ask the bank to waive covenant testing for the next couple of quarters instead of guessing at levels. In extreme circumstances, you may need to ask for some relief on upcoming principal payments. The greater the concessions, the more the bank will want in return. Often these take the form of amendment fees, an increased interest rate, and increased reporting requirements.