Single Debtor Concentration Limits in Invoice Discounting Facilities
Single debtor concentration limits reclassify customer receivables above a strict percentage ceiling into unapproved debt, directly reducing cash advances.
Covenant Test
Meaning
Financial monitoring procedures evaluate a borrower’s compliance with the operational or financial thresholds specified in a loan agreement. Commercial lenders use a covenant test to verify the ongoing creditworthiness of a corporate borrower. This assessment calculates ratios like gearing or interest coverage at specified quarterly or annual intervals.
The test stops applying once the debt is fully repaid or the facility is cancelled.
Measurement Period
Calculation methodologies rely on historical financial statements for the preceding twelve months. Borrowers must provide audited statements within a set period after the quarter ends. The covenant test uses adjusted earnings figures that exclude one-time expenses or restructuring costs.
These adjustments are negotiated during the initial drafting of the credit agreement.
Breaching Outcome
Failure to meet the required ratios triggers a technical default. Lenders can choose to waive the infraction, demand immediate repayment or increase the interest margin. A failed covenant test alters the balance of power between borrower and lender.
The breach often results in tighter operational restrictions and additional fees.
Gearing Ratio
Debt to earnings ratios measure the borrower’s total indebtedness against cash flows. This specific calculation tracks whether the business is taking on excessive risk. High ratios indicate potential solvency issues.