Banking Covenant Compliance

Document Type: Procedure
Version: 1.0
Last Updated: February 2026
Distribute To: CFO, Controller

Purpose

Establish procedures for monitoring and maintaining compliance with banking covenants.

What Are Covenants?

Contractual requirements in loan agreements that borrowers must maintain. Violation can trigger:

Default notice
Increased interest rate
Acceleration of loan
Loss of credit availability

Common Construction Loan Covenants

Financial Covenants:

Covenant	Typical Requirement	Calculation
Minimum Working Capital	$X or X% of revenue	CA - CL
Current Ratio	≥ 1.1 to 1.25	CA ÷ CL
Minimum Tangible Net Worth	$X or maintain	Equity - Intangibles
Debt to Equity	≤ 3.0 to 4.0	Total Liabilities ÷ Equity
Debt Service Coverage	≥ 1.1 to 1.25	EBITDA ÷ Debt Service
Maximum Leverage	Various	Various

Operating Covenants:

Covenant	Requirement
Maintain insurance	Specified coverage
Provide financials	Quarterly/annually
No change in ownership	Without consent
No material change in business	Without consent
Notify of litigation	Material matters

Covenant Monitoring

Monthly Covenant Calculation:

================================================================
         COVENANT COMPLIANCE WORKSHEET
================================================================

As of: ____________________

Loan: _____________________  Bank: _________________________

================================================================

COVENANT 1: MINIMUM WORKING CAPITAL

Required:                    $____________

Calculation:
  Current Assets:            $____________
  Current Liabilities:       $____________
  Working Capital:           $____________

Status: ☐ Compliant  ☐ Non-Compliant

Cushion/(Shortfall):         $____________

================================================================

COVENANT 2: CURRENT RATIO

Required:                    ≥ ______

Calculation:
  Current Assets:            $____________
  Current Liabilities:       $____________
  Current Ratio:             ______

Status: ☐ Compliant  ☐ Non-Compliant

Cushion/(Shortfall):         ______

================================================================

COVENANT 3: MINIMUM TANGIBLE NET WORTH

Required:                    $____________

Calculation:
  Total Equity:              $____________
  Less: Intangible Assets:   $____________
  Tangible Net Worth:        $____________

Status: ☐ Compliant  ☐ Non-Compliant

Cushion/(Shortfall):         $____________

================================================================

COVENANT 4: DEBT TO EQUITY

Required:                    ≤ ______

Calculation:
  Total Liabilities:         $____________
  Equity:                    $____________
  Debt to Equity:            ______

Status: ☐ Compliant  ☐ Non-Compliant

Cushion/(Shortfall):         ______

================================================================

COVENANT 5: DEBT SERVICE COVERAGE RATIO

Required:                    ≥ ______

Calculation (Trailing 12 months):
  EBITDA:                    $____________
  Annual Debt Service:       $____________
  DSCR:                      ______

Status: ☐ Compliant  ☐ Non-Compliant

Cushion/(Shortfall):         ______

================================================================

OVERALL STATUS: ☐ Fully Compliant  ☐ Covenant Violation

Prepared By: _______________________  Date: ________________

Reviewed By: ______________________  Date: ________________

================================================================

Covenant Definitions

Working Capital:

Current Assets:
+ Cash
+ Accounts Receivable
+ Costs in Excess of Billings (may be excluded)
+ Inventory (if any)
+ Prepaid Expenses
- Retentions Receivable (per agreement)
= Total Current Assets

Current Liabilities:
+ Accounts Payable
+ Billings in Excess of Costs
+ Accrued Expenses
+ Current Portion LTD
+ Line of Credit
= Total Current Liabilities

Working Capital = Current Assets - Current Liabilities

Tangible Net Worth:

Total Equity:
- Goodwill
- Other Intangibles
- Related Party Receivables (per agreement)
= Tangible Net Worth

Debt Service Coverage:

EBITDA:
  Net Income
+ Interest Expense
+ Depreciation
+ Amortization
+ Non-Cash Adjustments
= EBITDA

Debt Service:
  Interest Payments
+ Principal Payments (current year)
= Annual Debt Service

DSCR = EBITDA ÷ Debt Service

Note: Definitions vary by agreement—always verify with actual loan documents.

Compliance Certificate

Typical Requirements:

Banks require periodic certification (usually quarterly):

================================================================
         COMPLIANCE CERTIFICATE
================================================================

To: [Bank Name]

Reference: Credit Agreement dated [Date]

As of [Period End Date], the undersigned certifies that:

1. No Event of Default has occurred and is continuing.

2. The representations and warranties in the Credit 
   Agreement remain true and correct.

3. The following financial covenants are met:

   | Covenant | Required | Actual | Compliant |
   |----------|----------|--------|-----------|
   | [Cov 1]  |          |        | Yes/No    |
   | [Cov 2]  |          |        | Yes/No    |
   | [Cov 3]  |          |        | Yes/No    |

4. Attached are the financial statements and supporting 
   calculations for the period ending [Date].

IN WITNESS WHEREOF, the undersigned has executed this 
Certificate as of [Date].

[Company Name]

By: _____________________________
Name:
Title:

================================================================

Early Warning System

Projecting Covenant Compliance:

Monthly Projection:

Month	Working Capital	Current Ratio	TNW	Status
Jan
Feb
Mar

Warning Thresholds:

Covenant	Requirement	Yellow Zone	Red Zone
Current Ratio	≥1.20	1.20-1.30	under 1.20
Debt/Equity	≤3.0	2.5-3.0	over 2.8
DSCR	≥1.15	1.15-1.25	under 1.20

If Covenant Violation Anticipated

Proactive Steps:

Project the Problem
- When will violation occur?
- How severe?
- Temporary or ongoing?
Explore Remediation
- Can you prevent it? (Collections, defer expenses)
- Is there a legitimate fix?
Contact Bank Early
- Don't surprise them
- Explain circumstances
- Present plan
Request Waiver/Amendment
- Formal waiver for temporary issue
- Amendment for structural change
- Be prepared to negotiate terms

What Banks Want to Know:

Why did this happen?
What's your plan to cure?
Is this temporary or structural?
What changed since loan was made?
How can you prevent recurrence?

Covenant Remediation Strategies

Quick Fixes:

Action	Impact
Accelerate collections	Increases cash, reduces AR
Delay discretionary payables	Increases WC short-term
Defer equipment purchases	Reduces debt
Equity injection	Improves all ratios
Subordinated debt	May be excluded from ratios

Structural Solutions:

Issue	Solution
Ongoing WC shortage	Equity contribution, better cash management
High leverage	Pay down debt, limit draws
Low DSCR	Increase profitability, extend debt term

Reporting Requirements

Typical Bank Requirements:

Report	Frequency	Due
Compliance certificate	Quarterly	45 days after quarter
Financial statements	Quarterly	45 days after quarter
Annual audited financials	Annual	90-120 days after YE
WIP schedule	Quarterly	With financials
Backlog report	Quarterly	With financials
AR aging	Monthly	30 days
Borrowing base	Monthly	Per agreement

Banking Relationships
Financial Reporting
Cash Flow Management
WIP Reporting

Template provided by support.construction. Monitor covenants before the bank does.

Purpose​

What Are Covenants?​

Common Construction Loan Covenants​

Financial Covenants:​

Operating Covenants:​

Covenant Monitoring​

Monthly Covenant Calculation:​

Covenant Definitions​

Working Capital:​

Tangible Net Worth:​

Debt Service Coverage:​

Compliance Certificate​

Typical Requirements:​

Early Warning System​

Projecting Covenant Compliance:​

Warning Thresholds:​

If Covenant Violation Anticipated​

Proactive Steps:​

What Banks Want to Know:​

Covenant Remediation Strategies​

Quick Fixes:​

Structural Solutions:​

Reporting Requirements​

Typical Bank Requirements:​

Related Documents​