The following is a guest post from Michael Paull, president and CFO at The Ahola Corporation. Opinions are the author’s own.
I have sat across the table from a lender in a workout situation where the numbers were improving, but the damage was already done. Reporting had been inconsistent, disclosures were limited and there had been too many surprises. By the time I arrived, credibility was gone. Better numbers and technical compliance were not enough to save it. There was no way out without the lender’s continued support, and the lender had lost confidence. Enough trust was restored to buy time, improve performance and find a buyer. The alternative was a called loan and bankruptcy. It was a lesson about trust rather than covenants.
Many CFOs approach their banking relationships transactionally. Negotiate the deal, execute the agreement, meet the reporting deadlines and move on. That approach works until it doesn’t. The companies that manage their bank relationships most effectively treat them as a strategic asset that requires active investment and careful management. The return on that investment compounds over time and becomes most valuable precisely when you need it most.
Structure the agreement for how you actually operate
The goal in negotiating a credit facility is not simply to optimize economics. It is to structure an agreement that you can operate under without recurring surprises or trips back to the lender. Fewer mid-facility negotiations generally make for a smoother relationship over time.
After determining the amount, most CFOs focus their negotiating energy on rate, structure and fees. Those things matter, but they are not where deals go wrong in year two or three. Where they go wrong is in living with the agreement.
Covenant definitions deserve as much attention as covenant levels. An EBITDA coverage ratio sounds straightforward until you discover that the credit agreement defines EBITDA differently than you do internally. The addbacks you rely on may not be recognized under the agreement’s definition. That may sound like a technicality, but it can quickly become a real compliance issue that you negotiated into existence.
Restrictive covenants deserve equal scrutiny. Many credit agreements require lender consent before the borrower can acquire a business, take on additional debt or even finance equipment. In practice, asking permission for routine operating decisions introduces delay and signals uncertainty about your independence. Before signing, negotiate baskets and carve-outs that give you room to operate. Pre-approved thresholds for equipment financing and modest acquisitions are reasonable to request and are often granted. The goal is to establish flexibility before the game begins, not to discover mid-year that a routine capital decision requires a phone call to your banker.
Collateral deserves the same proactive attention. Lenders will often seek a blanket lien on all assets, which sounds straightforward until it creates friction around assets that were never intended to be part of the operating business. If you hold land for future sale, for example, you do not want that tied up as collateral. You know going in that the likely disposition is a sale, and encumbering it complicates that transaction and potentially requires lender consent or a waiver at exactly the wrong time. Carve it out before signing. The same logic applies to any non-operating or non-core asset you expect to monetize. Identifying those assets early and negotiating their exclusion is not about gaining an advantage over your lender. It is about avoiding a future conversation that neither party wants to have.
A lender who never has to field an unexpected consent request, a covenant dispute or a collateral complication is a lender who stays focused on being your partner. These are not concessions you are extracting. They are the conditions for a cleaner, more predictable relationship on both sides.
In the end, the objective is to negotiate a facility you can actually operate under effectively until its full term.
Forecast compliance, not just performance
Covenant compliance should be part of your regular forecasting process, not a quarterly reconciliation exercise. A surprise breach is almost always avoidable. When it happens, it is generally because no one was projecting forward with enough discipline or frequency.
Running a rolling compliance forecast gives you lead time and if you can see three months out that a leverage ratio is going to tighten, you have options. You can adjust operations, accelerate collections or defer spending. More importantly, you can call your banker proactively, before the quarter closes, and frame the situation on your terms rather than responding defensively after the fact.
A proactive conversation from a position of awareness is a very different conversation than an urgent call after a missed covenant. One conversation signals awareness and control. The other tends to create concern very quickly.
Reporting as a relationship asset
Timely, accurate financial reporting is a baseline expectation. It is not a differentiator. What differentiates borrowers is the quality and consistency of what they submit.
Credit agreements typically specify reporting deadlines tied to external milestones. Depending on the size and terms of your facility, annual audited financials may be due anywhere from 60 to 120 days after year-end. Whatever the deadline, it demands that you be fully synchronized with your audit firm well before year-end. A CFO who treats the audit as something that happens to them, rather than a process they are actively managing, will consistently find themselves in late delivery situations. Over time, late or incomplete reporting erodes credibility in ways that are difficult to recover from.
Lenders read reporting quality as a proxy for management quality. A well-organized, consistently formatted reporting package with an executed compliance certificate that arrives on time signals discipline and competence. A package that arrives late, contains inconsistencies or requires follow-up questions signals the opposite. The content of the financials matters, but so does everything around them.
And increasingly, lenders are deploying automated monitoring tools that track borrower activity in real time. If your operating accounts are at the same bank as your credit facility, your lender has continuous visibility into your cash flow patterns. A sudden drop in average daily balances or an unusual spike in outflows can trigger an internal alert before you have had a chance to address it, or even before you are aware of it yourself. Proactive communication is no longer just good practice. It is your best defense.
Beyond technical compliance
Technical compliance is the floor, not the ceiling. Most borrowers understand this in theory but manage to the floor anyway.
What many borrowers do not fully appreciate is that most credit agreements include an insecurity clause. The specific language varies, but the effect is similar across facilities: If the lender, in its reasonable judgment, determines that there has been a material adverse change in the borrower’s condition or that the prospect of repayment is impaired, it can accelerate the loan or refuse to advance funds. The threshold for invoking this clause is intentionally low. A lender does not need a technical breach. It needs a loss of confidence. This is the tool that was available to the lender in the situation I described earlier.
That is a meaningful reality. It means you are always being evaluated, not just at reporting deadlines. A poor relationship can prove fatal even when every covenant is technically met. Managing only to the compliance calendar is not sufficient protection.
The remedy is consistent, proactive communication that goes well beyond what the agreement requires. Share significant developments with your banker as they happen, not when a report is due. A major new client, a strong quarter, a completed acquisition, a key leadership addition. These are not items to save for the next compliance package. Your banker should know about them when they happen.
The same discipline applies to bad news. A large customer loss, an unexpected cost, a delayed project. Your banker should not read about it in a financial statement three months after the fact. Delivering difficult news proactively, with context and a plan, drives credibility. It demonstrates that you are in control of your business, even when the business is not performing as planned.
A banker who genuinely feels connected to your business is far more likely to work constructively with you than one who only monitors the compliance calendar for problems.
That distinction becomes concrete when you need a waiver or an amendment, and most borrowers eventually do. The company that has been communicating proactively will have a very different conversation than the company that has been transactional and silent. Both may ultimately receive the waiver, but the company that has built credibility over time will almost certainly have a much easier conversation.
The bank relationship is one of the most important and most undermanaged assets a CFO has. Most companies treat it as a periodic obligation. The strongest borrowers treat it as a continuous investment.
Negotiate agreements you can actually live under, forecast compliance with the same rigor you apply to performance, report with consistency and discipline and communicate proactively, with good news and bad, throughout the year.
Technical compliance gets you in the game. Trust keeps you there. When you need flexibility, a waiver, or a new facility, the relationship you have built will either open doors or close them. That outcome is within your control, and it starts long before you ever need it.
