Loan agreements · Business practice
Business loan covenant breaches: what to do
Payments are on time but a ratio is below its threshold, or the bank reports missed account turnover. We explain calculation checks, documents and early discussions before financing is affected.
Covenants can be breached without payment arrears
Covenants are contractual indicators, duties and restrictions. Timely interest does not prove compliance with DSCR, turnover, reporting or new-debt consent. Test each obligation separately.
For terminology, start with covenants and pre-signing agreement checks . This article concerns an identified deviation.
Russian Civil Code Article 821.1 permits contractual early-repayment grounds for LLCs and entrepreneurs. Refusal of further lending is separately regulated, including Article 821. Establish the basis, process and terms rather than assuming automatic full repayment.
Check drawdown restrictions, contractual breach fees, acceleration and effects on other agreements. An existing bank demand requires legal review of grounds and dates alongside financial analysis.
Actions after finding a breach
- Gather current terms. The agreement, incorporated general conditions, appendices and amendments. Identify the covenant, test date, notice and cure period. No universal three-day or one-month period applies.
- Recalculate under the agreement. Check period, sources, group perimeter, liabilities and adjustments. Errors and actual breaches need different responses. Explain differences between borrower and bank versions.
- Review cash flow and drawdown availability. Prepare near-term receipts/payments and a no-new-funding scenario. Unconfirmed drawdowns are not guaranteed repayment sources.
- Notify the bank properly. Follow contractual timing, recipient and channel; retain dispatch/receipt evidence. Manager discussions may not replace formal notice. State if calculations remain under review.
- Propose a measurable plan. Give causes, actions, responsibility, dates and funding. Show confirmed orders, receipts and the next test forecast rather than vague recovery promises.
- Document the agreed outcome. Confirm decision authority, form, breach and period covered, drawdown effects, payments and earlier consequences.
Example: DSCR below threshold without arrears
Assume DSCR is contractual cash flow available for debt divided by principal and interest for the same period. The illustrative minimum is 1.20. These are example terms, not a universal bank standard.
| Indicator | Value |
|---|---|
| Cash flow under the agreement | RUB 10.8 million |
| Principal and interest payments | RUB 10 million |
| Actual DSCR | 10.8 ÷ 10 = 1.08 |
| Contract requirement | At least 1.20 |
| Cash needed at unchanged payments | 10 × 1.20 = RUB 12 million; difference: RUB 1.2 million |
For a future comparable period with RUB 10.8 million cash flow, threshold-compatible payments are 10.8 ÷ 1.20 = RUB 9 million. This supports schedule discussions. Revised timing can change interest, requiring recalculation after agreement.
A forecast does not correct a past test date. Future schedules or cash improvements do not themselves cure recorded breaches. Shareholder funding cannot automatically count as operating cash; the agreement defines the metric.
Check your scenario
Use one period and the example formula. Enter RUB million. This does not replace a different contractual method.
Options to discuss with the bank
Choices depend on cause and repayment capacity. Negotiations alone do not establish amended terms.
- Clarify calculations. Support errors with data and agree interpretation. Do not redefine indicators merely to achieve a better result.
- Agree non-application of specified consequences. Often called a waiver. Content, authority, period and conditions matter more than the name; it is not automatic debt forgiveness.
- Change future covenants. Propose justified threshold, period or adjustment changes. Banks need not agree.
- Change schedules or structure. Discuss realistic terms and repayment sources, including additional interest, fees and security.
Russian Civil Code Article 452 generally requires amendments in the agreement's form, subject to exceptions. Verbal manager promises are not sufficient changes.
Documents for banks
This is a working discussion pack rather than a universal mandatory list. Adapt it to the contract and lender request.
Tables scroll horizontally on phones.
| Document | Contents |
|---|---|
| Covenant schedule | Clause, formula, threshold, test date, actual value and deviation. |
| Detailed calculation | Sources, reporting references, debt composition and agreed adjustments. |
| Cause evidence | Delayed receipts, costs or business changes specifically explaining the deviation. |
| Payment calendar | Receipts, expenses, debt and balances, plus key-payment delay stress. |
| Recovery plan | Actions, amounts, dates, responsibility and next-test forecast. |
| Specific bank request | Decision, period, condition and consequences concerned. |
Letters, accounts and calendars should agree. See management accounts for banks .
Sample covenant request
Adapt to the agreement and confirmed facts. If disputing the bank, explain differences without admitting an unconfirmed breach.
This does not replace a notice with required form/content. Submission neither implies bank consent nor changes the schedule.
Actions that worsen the position
- Missing notice deadlines while negotiating. Procedural compliance is separate from negotiation outcomes.
- Manipulating reporting to meet thresholds. Documented corrections are acceptable; fictitious revenue or omitted liabilities are not.
- Borrowing without checking restrictions. It can increase commitments and affect other covenants.
- Treating forecast customer payments as received cash. Separate forecasts from completed transactions.
- Assuming a discussion closes the matter. Ensure formal decisions cover the relevant date and consequences.
When to seek help
Several entities, bank-specific formulas or a no-drawdown cash gap require joint legal/financial review. Finance specialists check calculations and scenarios; lawyers assess demands and documentation.
Need to assess commitments and financing options?
NG Finance helps analyse indicators, prepare lender discussions and assess financing structure. The bank decides amendments.
Discuss your business situationFrequently asked questions
Can a covenant be breached without arrears?
Yes. Payments, ratios, turnover and reporting can be independent obligations.
Must the bank allow time to cure?
No universal period applies. Check the agreement, applicable law and demand.
Can the owner simply contribute money?
It may improve liquidity, but covenant effects depend on form and method. Shareholder loans can increase debt and may not count in DSCR cash flow.
What should bank consent contain?
Condition, period, decision, effects on past/future tests, drawdowns, costs and duties, properly documented.
Related articles
Sources and legal basis
- Russian Civil Code Article 821.1 — grounds for early repayment demands.
- Article 821 — refusal to provide or receive credit.
- Article 452 — agreement amendments and termination.
- Bank of Russia: credit documentation requirements, version 2026.0, Section 1.1 paragraph 10 — covenant performance within bank documentation, not a universal borrower document list.
Prepared 7 October 2026. Example and calculator are illustrative. Specific decisions require agreement documents and applicable law.