In case you have loan contracts which include some sort of covenants, there are a few things you want to keep in mind. Since often times the loan liabilities are considerable, proper dealings are a “must”.

First and foremost you have to agree with the bank on how various covenants are measured, what is and isn’t included into the calculations and how exactly the bank understands one-off deals. You want to agree on this to ensure you’re both on the “same page”. Creating a situation where you would think that everything is okay and the bank is on a different opinion is not a place you want to be.

In case you are not meeting the agreed covenants, you do want to inform the bank as soon as you became aware of it and try to negotiate getting a waiver from the bank. A waiver usually means that the bank is not exercising its right to call back the loan in full.

Now an important thing to consider is the timing of getting this waiver. Getting it after the balance sheet date means that at the date the loan was still short term as at that time the bank still had the right and it had not said it will not exercise the right. Getting it however prior to the balance sheet date means that at the date of forming the balance sheet you know and have proof to believe the loan is not called back in full. As such you can show the loan partially short and partially long term whereas with the first example the loan is classified as short term.

So measuring the covenants and taking appropriate actions as early as practicable ensures that you have a nice looking balance sheet and you will not have to explain to owners, investors or suppliers your means of overcoming this huge short term liability.