Relationship between FCCR and growth plans
Covenant cushion is a primary measure of covenant restrictiveness, given its implications on your capacity to invest in your business.
EBITDA. Due to EBITDA’s inverse relationship with operating expenses (OpEx), FCCR covenant cushion is a proxy for dollar capacity available to invest in new hires, systems upgrades, product launches / improvements, and other operating initiatives.
Capital Expenditures (CapEx). FCCR covenant cushion is also a proxy for dollar capacity available for longer-term capital investments, such as new equipment or facility expansion.
Further, your covenant cushion has relationship implications with your lender – as it is a metric they will track and forecast to watch for signs of stress and use to evaluate your standing within their broader portfolio. A common theme in recent lender conversations is higher scrutiny on FCCR and debt service coverage and increased priority of downside / recession-scenario pressure testing as part of credit underwriting.
What can you do about it?
Borrowers can’t control rates, but they can take steps to ensure loan covenants don’t interfere with growth:
- Plan. Forecast and pressure test your next four quarters of covenant compliance and cushion to understand timing and drivers of potential tightness.
- Adapt. Change what is under your control – such as the timing, magnitude and terms of OpEx and CapEx spending plans.
- Communicate. Be proactive – don’t wait until you’re in covenant breach to find a solution.