Many clients have some element of Bank borrowing and most forms of funding now come with a set of conditions known as ‘Covenants’. These covenants are to help reduce the risk for the bank by checking the business is performing well along the way.
There are two types of covenants:
Affirmative Covenants is a positive action you need to do to receive the loan and during the period of it. For example you could be required to send regular financial reports to the bank, or tell them important data such as room occupancy for a care home.
Negative Covenants are actions you should not do. For example there may be limits on how much income you can take from the business, or you may have to seek their permission before selling key assets.
No matter what your covenants are, it is important to uphold them and to not miss a deadline, otherwise it could result in the bank requesting the loan back. Some banks require the Accountant to report independently, but for many clients it is simply easier for the accountant to do the reporting to relieve the pressure on them.
Whatever the conditions of your borrowings, make sure you know what they are and meet them whenever possible. Sometimes it isn’t possible to achieve all the covenants, but prompt reporting and explanation to the bank can avoid any negative reaction.