Understanding Loan Covenants...

There's more to a bank loan than the interest rate. If you're securing a loan for your business, be sure to consider carefully the covenants in the loan agreement. Put in place to safeguard the bank, loan covenants can stipulate everything from financial ratios that the borrowing company must maintain to salary caps for its executives. What's more, any violation of an agreed-upon covenant can signal to your banker that something might be awry at your company, and you run the risk of having the loan called in.

Understanding loan covenants before you sign on the dotted line can help you better comply or, perhaps, prepare to negotiate more realistic covenants. The following five steps should help you navigate the loan-covenant jungle and put you in a better borrowing position:

1. Find out whether your prospective bank plans to retain your loan or sell it. In the latter case, there's probably less room for maneuvering over covenant issues.
2. Inquire about the bank's expertise in -- and funding experience with -- your industry. Covenants from industry specialists are often more realistic.
3. Ask to see a sample list of covenants before the date of the closing, so you can avoid a situation in which desperation for funds -- or a lack of careful analysis -- persuades you to simply sign anything. Make certain that you can live with the bank's terms about the consequences of going out of compliance.
4. Do a computer run of your company's past performance during the most recent one-,two-, and three-year periods to see if you could have complied with all loan covenants, especially key ratios, if your loan had been in place before now.
5. If those results indicate future problems, schedule a visit with your banker and suggest more realistic covenants.

Bob Ryan is widely acknowledged as one of the leading experts when it comes to helping ordinary people raise all the capital they need to fund their businesses.

His reputation for helping others succeed is well known in the business financing world.  Through his unique methods for raising capital he has helped his students raise over $456 Million dollars for their business ideas. You can find his insight and expertise when you visit his website www.fundmyideas.com or when you read his blockbuster course The Definitive Guide To Raising Capital® -- How To Fund Your Business In 30 Days Or Less!