Telephone
517-372-5900

Get COVID-19 updates and resources.

Menu

Why it's Critical to Take Stock of Current Loans and Bank Agreements during COVID-19

This article appeared in the April 2020 issue of MiMfg Magazine. Read the full issue and find past issues online.

As businesses assess their financial future amid this current crisis, they should consider taking advantage of local, state and federal aid programs. However, it’s critical to take a close look at existing lending relationships and agreements first.

While the federal government is requesting banks be creative in order to help their clients during this unprecedented time, businesses should consider their existing contractual agreements and covenants. Many loan agreements have restrictions against taking on additional debt or encumbering collateral without the existing lender’s authorization.

Here’s what you need to know about your existing lending relationships and agreements — and how to best position your business to maximize the available assistance programs.

Working with your business advisor can make a big difference. Banks often simply respond better to a trusted independent third-party. It’s smart to turn to a trusted business adviser who has experience working with lenders in these circumstances — this person understands the language lenders speak, the information they need for their regulatory requirements and the reality of the proposed potential solutions.

Understanding different loan violations can be key. For a company with an asset-based revolving loan, these sorts of volatile financial circumstances can create either an out-of-formula violation or an over-formula violation.

  • Out-of-formula violation: This kind of violation occurs when the existing loan balance, which was within the formulaic agreement previously, suddenly no longer is within the bounds of that formula because of some change in the collateral base. For example, most loans require accounts receivable be less than 90 days past due in order to be eligible to be included in the calculation of potential availability. Looking forward, it is likely that a business’ customers may be slow to pay. This could lead to becoming in-eligible and as a result, even though the company does not increase the amount that is has borrowed, it is now out-of-formula.
  • Over-formula violation: This type of violation occurs when the company writes checks and attempts to advance more money than the availability formula allows. This can happen in these circumstances as companies are pressured to write checks and do so hoping deposits will come in to cover them before the checks clear. Many companies attempt to play the float and can be caught over-formula when sudden disruptions in the economy take place.

Banks may offer remedies. If you’ve considered your financing and lending covenants, or calculations of eligible collateral to support, and have determined that they currently are in violation, or expect to be in violation of the future, there are several potential remedies to consider.

Keep in mind that such help may be delayed given the high number of companies expected to find themselves in this situation. Remedies include the following:

  • Waivers of covenants: Banks can simply waive the requirements for certain covenants. For example, lenders typically have the authority to waive the requirement of submitting reviewed financial statements within 90 days. In these cases, when a lender is contacted proactively, the greater the chances that requirements are waived and defaults are avoided.
  • Over-formula agreements: Lenders also can approve temporary formula violation allowances, which typically are called over-formula agreements. This allows a company to borrow a certain amount of money over what is supported by the collateral for a temporary period. The company then can get through a temporary liquidity problem.

Additional help is available. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides stimulus funding and emergency assistance to both individuals and businesses that have been impacted by the virus. Learn more about how your business can benefit from this Act and listen to informative audiocasts on the CARES Act and other business continuity and preparedness topics at rehmann.com/covid-19.


Premium Associate MemberRehmann is an MMA Premium Associate Member and has been an MMA member company since July 2006. Visit online: rehmann.com.

About the Author

Chip HoebekeChip Hoebeke, CPA, CIRA, is a principal with Rehmann. He may be reached at 616-975-2830 or hoebeke@rehmann.com.

This article appeared in the April 2020 issue of MiMfg Magazine. Read the full issue and find past issues online.

As businesses assess their financial future amid this current crisis, they should consider taking advantage of local, state and federal aid programs. However, it’s critical to take a close look at existing lending relationships and agreements first.

While the federal government is requesting banks be creative in order to help their clients during this unprecedented time, businesses should consider their existing contractual agreements and covenants. Many loan agreements have restrictions against taking on additional debt or encumbering collateral without the existing lender’s authorization.

Here’s what you need to know about your existing lending relationships and agreements — and how to best position your business to maximize the available assistance programs.

Working with your business advisor can make a big difference. Banks often simply respond better to a trusted independent third-party. It’s smart to turn to a trusted business adviser who has experience working with lenders in these circumstances — this person understands the language lenders speak, the information they need for their regulatory requirements and the reality of the proposed potential solutions.

Understanding different loan violations can be key. For a company with an asset-based revolving loan, these sorts of volatile financial circumstances can create either an out-of-formula violation or an over-formula violation.

  • Out-of-formula violation: This kind of violation occurs when the existing loan balance, which was within the formulaic agreement previously, suddenly no longer is within the bounds of that formula because of some change in the collateral base. For example, most loans require accounts receivable be less than 90 days past due in order to be eligible to be included in the calculation of potential availability. Looking forward, it is likely that a business’ customers may be slow to pay. This could lead to becoming in-eligible and as a result, even though the company does not increase the amount that is has borrowed, it is now out-of-formula.
  • Over-formula violation: This type of violation occurs when the company writes checks and attempts to advance more money than the availability formula allows. This can happen in these circumstances as companies are pressured to write checks and do so hoping deposits will come in to cover them before the checks clear. Many companies attempt to play the float and can be caught over-formula when sudden disruptions in the economy take place.

Banks may offer remedies. If you’ve considered your financing and lending covenants, or calculations of eligible collateral to support, and have determined that they currently are in violation, or expect to be in violation of the future, there are several potential remedies to consider.

Keep in mind that such help may be delayed given the high number of companies expected to find themselves in this situation. Remedies include the following:

  • Waivers of covenants: Banks can simply waive the requirements for certain covenants. For example, lenders typically have the authority to waive the requirement of submitting reviewed financial statements within 90 days. In these cases, when a lender is contacted proactively, the greater the chances that requirements are waived and defaults are avoided.
  • Over-formula agreements: Lenders also can approve temporary formula violation allowances, which typically are called over-formula agreements. This allows a company to borrow a certain amount of money over what is supported by the collateral for a temporary period. The company then can get through a temporary liquidity problem.

Additional help is available. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides stimulus funding and emergency assistance to both individuals and businesses that have been impacted by the virus. Learn more about how your business can benefit from this Act and listen to informative audiocasts on the CARES Act and other business continuity and preparedness topics at rehmann.com/covid-19.


Premium Associate MemberRehmann is an MMA Premium Associate Member and has been an MMA member company since July 2006. Visit online: rehmann.com.

About the Author

Chip HoebekeChip Hoebeke, CPA, CIRA, is a principal with Rehmann. He may be reached at 616-975-2830 or hoebeke@rehmann.com.
MFG Forum 2017
Events
MFG Forum 2017
The 2017 MFG Forum will outline the threats, discuss best practices and provide resources for protecting valuable manufacturing assets from cyber attack.
Mfg Excellence Awards 2017
Events
Mfg Excellence Awards 2017
This program recognizes excellence in manufacturing by honoring those who make a positive impact in their community and in their industry.
MFG Forum 2018
Events
MFG Forum 2018
The MFG Forum guides industry leaders through emerging issues like Industry 4.0 and provide resources to maintain Michigan’s manufacturing advantage in the 21st century.
Insurance Forms
Insurance, Internal Page
Insurance Forms
Download and print the forms you need to manage your benefits program.
Manufacturers Recognize Vantage Plastics for Community Impact
News
Manufacturers Recognize Vantage Plastics for Community Impact
MMA is proud to announce that Standish’s Vantage Plastics has been selected as the 2017 recipient of the MFG Community Impact Award.
Manufacturing’s Plan for Michigan
Advocacy
Manufacturing’s Plan for Michigan
Michigan’s economy is growing — but more remains to be done. Discover the industry’s top priorities for the 2017-2018 Legislative Session and help keep manufacturing moving forward.
Lobby Day 2017
Events
Lobby Day 2017
An exclusive behind-the-scenes look at the legislative process led by MMA’s Government Affairs team.
Reduced UI Taxable Wage Base Available in 2018
Advocacy
Reduced UI Taxable Wage Base Available in 2018
Eligible employers will qualify for a reduced taxable wage base of $9,000 for calendar year 2018 thanks to MMA-supported legislation passed in 2011.