Could time to pay impact your banking covenants?
As a result of the COVID-19 pandemic, many businesses have entered into time to pay arrangements for their corporation tax. At some point though, historic tax payments will overlap with new taxation liabilities. This may create further cash flow pressure, particularly at a time when working capital also needs to be ramped up. In addition, the duplicity of taxation payments may negatively impact banking covenant tests.
When agreeing a term loan, lenders typically include a cash flow to debt service covenant. The cash flow part of this equation is likely to be calculated after taxation paid. As a result, if this includes both past and present tax liabilities, coverages could weaken.
Covenant test levels may already have been weakened by a fall in trading over recent months. Furthermore, due to their rolling nature, it is important to remember that any negative impact can take several test periods to filter through.
Cash flow forecasts are of course essential for business planning. However, by linking these forecasts with expected covenant tests, a tight or even breached covenant position can be predicted. With this knowledge lenders can be contacted early for renegotiation.
If you need help with forecasting or banking covenants, then please let us know.
Our contact details are:
07780 336956 Raemy Singh FCA
07780 336952 Delphine Paterson FCCA ACIB
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