Banks are not your friend as a business owner.
I’ve seen the friendly banker offer a term sheet, only for the owner to sign and immediately be out of covenant.
When I looked months/years back, they never even had a chance to be in covenant.
So what was the bank’s plan? No idea!
If you own a business and are getting debt, ask the banker to show you their calculations.
I’ve had multiple banks show me their calculation, only to prepare it myself and find they calculated it differently than the “traditional” calculation.
Once you understand how they calculate it, make sure you understand:
1. What is the real cushion? (Worst month or worst quarter vs the threshold.)
2. What triggers default, and what happens next? (Grace period, pricing, paydown, LOC freeze.)
3. What reporting work does this create? (Monthly submitting financials is one thing. Audits and tax timelines that don’t line up with your schedule is another.)
4. What should you negotiate before you sign? (Headroom, definitions, step downs, springing covenants.)
There are great bankers and bad ones, just like anything else. Doesn’t matter… it’s ultimately your responsibility as the business owner.
Make sure you understand it, or have a good person in your corner to help you.