Covenants are agreements that you sign upon obtaining a loan or investment. They can include positive covenants and negative covenants.
Positive covenants specify actions that you will take, such as maintaining a certain level of insurance and developing monthly financial statements and sending a copy to the lender.
Negative covenants are clauses that keep you from doing things that can injure the lender.
Financial covenants spell out financial ratios and numbers that you must maintain.
Debt instruments also usually restrict flexibility more than equity, thus increasing the risk of default.
In an equity financing, you can lose control of your company if you don’t satisfy your covenants.
Monitor Your Performance
A quarterly review is better than an annual review; a monthly review is better still, and a weekly review is best of all-it lets you identify and react to your strengths and weaknesses more quickly.
The more quickly you monitor your business, the better off you’ll be. You need to monitor the key variables in your business on a weekly or daily basis. These include the levels of sales, collections, cash, payables, receivables, and cost of materials and labor. On a monthly basis, you should also examine your overhead figures and break-even levels.
Keep Lenders and Investors Informed
All lenders have clauses in their contract about the timely submission of accurate financial statements. When you violate this clause, they think that you are trying to hide something, and so they are more likely to call the loan.
Lenders and investors are more likely to be lenient if they are informed immediately about a problem and told what is being done to correct it. Get your lenders involved in developing the solution.
Planning for Future Financing
No matter what type of business you operate you should constantly be making plans for future financing. Remember the lenders and investors who helped you early on in your venture. Be loyal to them; when tough times return, they will most likely be loyal to you.