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Understanding what a covenant breach triggers
Financial covenants — such as minimum interest cover, maximum net debt to EBITDA, or minimum tangible net worth — are tested at intervals specified in the facility agreement, typically quarterly or annually against audited accounts. A breach does not mean the lender can immediately demand repayment; it means an event of default has occurred, giving the lender certain rights. What those rights are, and when they can be exercised, depends entirely on the wording of your agreement.
The cure period and how to use it
Most agreements include a cure period — a defined window during which the borrower can remedy the breach or negotiate a waiver. Use this period actively. Engage your accountant or CFO immediately to quantify the breach and assess whether it is a one-period anomaly or likely to persist. Then approach your lender with a written summary of the cause, your current position, and your proposed remedy.
Requesting a formal waiver
A waiver is a written agreement from the lender that they will not exercise their default rights in respect of the specified breach. Waivers are time-limited and covenant-specific — they do not reset the covenant for future periods. Lenders usually charge a waiver fee and may impose additional conditions, such as providing quarterly management accounts for the next year or granting enhanced security. Negotiate the terms carefully; accept only what the business can realistically comply with.
When to take independent legal advice
If your lender issues a formal notice of default, or if you receive any correspondence that appears to accelerate the loan or threaten enforcement, take independent legal advice before responding. A solicitor specialising in banking and finance can advise on the enforceability of the default clause, your rights during any cure period, and the negotiating position you hold. Do not simply ignore a default notice — inaction can extinguish options that would otherwise be available.
Frequently asked questions
Can we renegotiate a financial covenant that our business can no longer meet?
Yes. If a covenant was set at a level that no longer reflects your business model — for example, following an acquisition or change in revenue mix — you can request a covenant reset. This is treated as a material variation to the facility agreement and will involve a credit review and, typically, a fee.
Does a covenant waiver appear on our Companies House record?
No. A covenant waiver is a private agreement between borrower and lender and does not appear on the Companies House register unless it materially amends the registered charge, in which case a variation may need to be filed.
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