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By Travis Yule — CEO & Founder, Full Send Funding
On one balance sheet current ratio, working capital and DSCR pass while fixed-charge coverage fails at 1.06× — only it counts cash paid out before the bank.
In one sentence: A financial covenant is a promise about numbers not yet produced, tested from the borrower's own statements on a date in the agreement — and on one worked balance sheet the current ratio, working capital and DSCR pass while fixed-charge coverage fails, because only it counts the cash that left before the bank was paid.
A financial covenant is a promise you make to a lender about numbers you have not produced yet. Keep the current ratio above 1.25. Keep working capital above $250,000. Keep debt service coverage above 1.25×, fixed-charge coverage above 1.10×. Each is tested from your own financial statements, on a date written into the agreement, for every quarter or year the loan is outstanding — and breaching one is a default under the agreement whether or not you have missed a payment.
The usual framing treats covenants as a checklist of hurdles, and the usual advice is to keep the ratios healthy. That misses what a covenant is for. A lender writes covenants because a term loan or a bank line is priced on the assumption that the business will look, in three years, roughly the way it looks today; the covenants are the tripwires that let the lender back out of that assumption early. Which means the useful questions are not "what is a good current ratio" but what does each test actually catch, how far is this business from tripping it, which of the moves that lift the number are real, and what happens the morning after it fails.
We underwrite from the other side of the table — no financial-statement covenants, a remittance sized against deposits instead — so this is written to be useful whether you are signing a bank agreement, already inside one and running out of room, or deciding whether a revenue-based facility is the right thing to put beside it. The four tests are computed below on one worked balance sheet, and the arithmetic is the article.
Three distinctions do most of the work.
A financial covenant is not a payment obligation. You can be current on every payment and in default on the loan, because the agreement says the current ratio shall not fall below 1.25 and on the test date it was 1.19. The lender's remedies on a covenant default are, on the page, the same as on a missed payment: the right to stop advancing on the line, to accelerate the balance, to raise the rate, to require additional collateral or guarantees. In our experience, most first breaches end in a waiver rather than an acceleration, but the leverage in that conversation belongs entirely to the lender, and the waiver is not free.
Covenants are tested from your statements, on a schedule. The packages we see test the balance-sheet ratios at each fiscal quarter end and the coverage ratios on a trailing-twelve-month basis, with a compliance certificate signed by an officer within thirty to forty-five days of the period end; there is no public dataset of these terms, and the timing is common practice rather than a rule. The lender is reading a snapshot you prepared. That is why so much covenant management is calendar management — and why an agreement that defines its terms carefully closes most of the moves described below.
The definitions are in the agreement, not in a textbook. "EBITDA" in a loan agreement is whatever the definitions section says it is, and a sophisticated agreement will subtract owner distributions, cap add-backs for one-time items, and count operating lease payments as fixed charges. Two businesses with identical books can pass and fail the same-sounding covenant because their agreements define the numerator differently. Read the definitions before the ratios; the ratio is only the last line of the calculation.
There is no public dataset of the covenant packages written into small-business bank loans — banks do not publish their agreements, and no regulator collects the terms. The thresholds used below — a current ratio of 1.25, working capital of $250,000, debt service coverage of 1.25× and fixed-charge coverage of 1.10× — are illustrative conventional bank terms of the kind that appear in the term sheets borrowers bring us, not a published standard. The direction of travel is public even where a bank's numbers are not: the SBA retired its score-based pre-screen for 7(a) Small Loans in 2026 and told lenders to apply the same credit analysis they use on non-SBA loans of the same type and size,[1][2] which makes demonstrated debt service coverage rather than a score the target, and SOP 50 10 8 sets the floor for a guaranteed loan at 1.0× (1:1) for 7(a) Small Loans of $350,000 or less and 1.15× for loans above that.[4] A bank's own covenant on a conventional loan commonly sits above that floor, and the figure it requires is in its own policy. Treat the thresholds as illustrative and the mechanics as general.
The example is a regional food-service distributor with $6 million of annual revenue — chosen because a distributor carries inventory, receivables and payables in the proportions that make all four tests interesting. Its year-end balance sheet, current section only, reads as follows.
An illustrative balance sheet, not a client's. Totals are the sums of the lines above them; working capital is total current assets less total current liabilities. The income inputs the covenant tests use are stated in the prose: EBITDA $390,000, interest $60,000, scheduled principal $110,000 (the current portion shown), owner distributions $150,000 and $60,000 of capital expenditure paid from cash.
From the income statement for the same year: EBITDA of $390,000 (a 6.5% margin on $6 million), interest expense of $60,000 across the line and the term loan, and scheduled principal of $110,000 on the term loan, which is the current portion carried above. Debt service — principal plus interest — is therefore $170,000. The owner, an S-corporation shareholder, took $150,000 of distributions during the year to cover the tax on the pass-through income and to live on. The business spent $60,000 on a replacement delivery truck and a walk-in cooler, paid from cash rather than financed.
Those inputs are the whole basis. Here is what the four covenants make of them, against the thresholds in this business's agreement.
Computed from the balance sheet above and the stated income inputs: EBITDA $390,000, scheduled principal $110,000 plus interest $60,000 (debt service $170,000), cash capital expenditure $60,000, owner distributions $150,000. The required levels are illustrative thresholds of the kind that appear in small-business bank agreements for conventional loans, not a published standard; they are not the SBA's floors, which SOP 50 10 8 sets at 1.0× for 7(a) Small Loans of $350,000 or less and 1.15× above. Headroom is the tested value less the requirement, translated into the operating change that would consume it.
Read the result column before the numbers. Three of the four tests pass, one with room to spare. The fourth fails, and it fails on a business that just reported a 6.5% EBITDA margin, collected its receivables, and never missed a payment. That is the pattern to understand, because it is the most common way a healthy-looking small business ends up in a workout conversation.
Current ratio 1.36 against 1.25. Current assets of $1,170,000 divided by current liabilities of $860,000. The headroom is 0.11 of a ratio point, which sounds abstract until it is translated: current liabilities could rise by $76,000 with no change in current assets before the test fails ($1,170,000 ÷ 1.25 = $936,000), or current assets could fall by $95,000 ($860,000 × 1.25 = $1,075,000). One slow-paying customer written down, or one quarter's line draw to cover a seasonal build, consumes the room.
Working capital $310,000 against $250,000. The same two totals, subtracted rather than divided. Headroom is $60,000, and it is a dollar figure, which makes it easier to manage and easier to breach — every dollar of loss, distribution or long-term asset purchase paid from cash takes exactly a dollar off it. This is the covenant a contractor's surety watches most closely, for the reasons in why bonding capacity is a balance-sheet question.
Debt service coverage 2.29× against 1.25×. EBITDA of $390,000 divided by debt service of $170,000. Comfortable. EBITDA would have to fall to $212,500 — a 45.5% decline — before the test failed. On this number alone the lender would sleep well.
Fixed-charge coverage 1.06× against 1.10×. Start from the same $390,000. Subtract the $60,000 of capital expenditure paid from cash and the $150,000 the owner took out: $180,000 is what was actually left to service $170,000 of principal and interest. The business covered its debt 1.06 times — with $10,000 to spare on the year — and the agreement required 1.10. Breach.
The two coverage ratios share a denominator and differ in one thing: what the lender lets you count as available cash. DSCR counts EBITDA. Fixed-charge coverage counts EBITDA after the charges a lender knows you cannot skip — the cash taxes, the equipment that has to be replaced to keep operating, and the money the owner has demonstrated they will take out regardless.
That difference is a fixed subtraction, and a fixed subtraction makes a ratio steep. The figure runs both ratios through a decline in EBITDA, holding debt service, capex and distributions where they are.
A 30% fall in EBITDA leaves debt service coverage passing at 1.61× while fixed-charge coverage, which subtracts $210,000 of capex and distributions first, has fallen to 0.37×.
EBITDA of $390,000 reduced by each percentage shown; debt service held at $170,000 (principal $110,000 plus interest $60,000); cash capital expenditure held at $60,000 and owner distributions at $150,000. DSCR = EBITDA ÷ $170,000; FCCR = (EBITDA − $60,000 − $150,000) ÷ $170,000.
A 10% fall in EBITDA takes DSCR from 2.29× to 2.06× — still nearly twice the requirement. It takes fixed-charge coverage from 1.06× to 0.83×, which is no longer a covenant conversation but a cash conversation: the business is paying its debt out of its balance sheet. At a 30% decline, DSCR is still passing at 1.61× while fixed-charge coverage has fallen to 0.37×. The two ratios are describing the same business and one of them is lying by omission.
This is why a lender who writes only a DSCR covenant on an owner-operated business has written a test that the owner's own distributions can defeat, and why the better-drafted small-business agreements have moved to fixed-charge coverage, or to a DSCR whose numerator is defined net of distributions. It is also why, when we read a file, the number we look for is not EBITDA. It is what left the account.
Every balance-sheet covenant is a snapshot, and every business owner who has been through one year-end knows the snapshot can be posed for. The current ratio is the most posable of all, because a ratio above 1.0 rises when you shrink both sides of it by the same amount. Here is the distributor's 1.36 under six moves, each applied on its own to the year-end balance sheet above.
Paying payables from cash or terming out the line lifts the ratio without changing the business; collecting receivables early, which genuinely improves liquidity, does not move it at all.
Each move applied alone to the worked balance sheet (current assets $1,170,000, current liabilities $860,000). Paying payables: both sides less $100,000. Line draw: both sides plus $100,000. Terming out: the $250,000 line leaves current liabilities and one fifth of it, $50,000, returns as current portion. Inventory deferral: inventory and payables both less $80,000. Early collection: receivables less $150,000, cash plus $147,000 (the 2% discount). Owner loan: cash plus $70,000, the loan classified long-term under a subordination agreement.
Paying $100,000 of payables from cash the day before the test lifts the ratio from 1.36 to 1.41 — and changes nothing about the business. Current assets fall to $1,070,000, current liabilities to $760,000, and the quotient rises because the numerator was larger than the denominator to begin with. This is the oldest window-dressing move in commercial lending and it is why a well-drafted agreement tests the ratio at quarter ends rather than at one year end, and why lenders read the payables ageing beside the ratio.
Drawing $100,000 on the line to build cash does the opposite: 1.36 to 1.32. A draw adds the same amount to both sides, and adding to both sides of a ratio above 1.0 pulls it toward 1.0. Owners are surprised by this every year. Holding a bigger cash balance on borrowed money does not make you more liquid on paper; it makes you less.
Terming out the $250,000 line into a five-year loan lifts it to 1.77. The whole balance leaves current liabilities and only the first year's principal, $50,000, comes back as a current portion. Nothing about the business's cash has changed, the ratio has jumped more than 0.4, and — as the cure table below shows — the coverage ratio has just been made worse by the new principal. This is the move that lenders themselves propose most often, because it fixes the number they are being asked about.
Not placing an $80,000 inventory order until after the test lifts it to 1.40. Inventory and payables both come in $80,000 lower. Real for a week, and a real cost if the shelf is empty on the day a customer calls.
Collecting $150,000 of receivables early by offering a 2% discount does not move it at all. Receivables fall by $150,000, cash rises by $147,000, and the ratio is 1.36 before and 1.36 after — the current asset total is almost unchanged, and its composition is not what the current ratio measures. Which is precisely the point: a move that improves the business's actual liquidity is invisible to the covenant, while a move that merely reshuffles the balance sheet is rewarded. Nor does the quick ratio — current assets less inventory, over current liabilities — notice: $690,000 over $860,000 is 0.80 before and $687,000 over $860,000 is 0.80 after, because the cash simply replaced a receivable inside the same total. The only instruments that register the improvement are the cash line itself and the bank statement. The full account of what these ratios measure and miss is in what working capital is and how much to keep.
A $70,000 subordinated loan from the owner lifts it to 1.44. Cash rises by $70,000; the loan sits in long-term liabilities because the subordination agreement says it cannot be repaid ahead of the bank. This one is real in the sense that new money actually arrived — and it is the cure a lender most readily accepts, for that reason.
The lender's counter to all of this is drafting. Agreements that have been through a workout or two test at every quarter end, require an ageing with each certificate, define current liabilities to include the full line balance whatever its maturity, and cap the amount of related-party receivables that count as current assets. A borrower who plans their year around the test date is not doing anything the lender has not seen.
The compliance certificate states the four numbers and a signature. What the credit officer does with it is different from what most borrowers imagine.
The trend, not the level. A current ratio of 1.36 that was 1.62 four quarters ago and 1.48 two quarters ago is a business drifting toward its covenant at a measurable rate, and the officer will have computed the quarter it arrives. A ratio that has sat at 1.35 for three years is a business that manages to the covenant, which is read as competence.
The headroom in dollars. A lender translates every ratio covenant into the operating event that would consume it — the $76,000 of additional current liabilities above, or the 45.5% EBITDA decline. Headroom of $60,000 on the working-capital covenant is one bad month for a $6 million business, and the officer knows that better than the borrower does.
What the distributions say. The $150,000 that came out of this business went out before the bank was paid, in cash, and it will go out again next year, because the owner's tax bill does not wait for a covenant. A lender reads distributions as a fixed charge whether or not the agreement calls them one.
Whether the numbers reconcile to the bank. Cash on the certificate is compared with the statements the bank already holds. Receivables are compared with the ageing. A distributor whose receivables grew 30% on revenue that grew 8% has either lost a collections clerk or has a customer it is not talking about.
Whether the breach was disclosed or discovered. This is the one that decides the tone of everything after. A borrower who calls in month two of the quarter to say the fixed-charge test will fail on the trailing twelve months, and why, and what they propose, receives a different reception from one whose certificate arrives forty-five days late with a footnote. In our own underwriting the principle is identical and the document is the bank statement rather than the certificate: an undisclosed position found in the statements costs more than the position itself.
Once a covenant is breached, the agreement's own words decide what happens, and the words vary. This is information, not legal advice; the loan agreement controls, and an attorney in your state should read yours before you sign it and again before you breach it. The common structure is this.
The breach is an event of default when tested, not when it occurs. Most agreements define the default by reference to the test date and the certificate. A business whose fixed-charge coverage dipped below 1.10× mid-quarter and recovered by the quarter end has not, on most drafting, breached. A few agreements test continuously; those are the ones to know about.
A cure period may or may not exist. Payment defaults almost always carry a grace period. Covenant defaults often carry none — the breach is a default on the test date and the lender's remedies are available from that day — but many agreements grant an equity cure: the right, a limited number of times over the life of the loan, to have a contribution of new equity or subordinated debt counted as if it had been EBITDA or working capital on the test date. An agreement with two equity cures over five years, no two in consecutive quarters, is a normal small-business package. An agreement with none leaves you dependent on a waiver.
A waiver is the lender's consent to overlook the default, and it is priced. The usual terms, in the agreements borrowers bring us, are a waiver fee — a quarter to a full point on the outstanding balance — a rate increase for the period until the next clean test, and an amendment that tightens something: a lower distribution cap, a monthly rather than quarterly test, a borrowing base where there was none. A waiver is a renegotiation in which one side has already established that it can call the loan.
A reservation of rights is the lender not deciding yet. Between the breach and the waiver there is often a letter stating that the lender is aware of the default, is continuing to advance on the line at its discretion, and reserves every remedy. Read it as the most important document in the file: it means the line is now a day-to-day facility, and a plan to depend on it through the next season has stopped being a plan.
The personal guarantee stands behind all of it. A covenant default on a guaranteed loan is a default the guarantor has signed for; what a personal guarantee actually commits you to is worth re-reading on the day a certificate goes out with a breach in it.
A cure is a change the agreement recognises, made inside the period it allows, that restores compliance. The following are the ones a lender will actually accept for the distributor's fixed-charge breach, with the arithmetic for each, and — because the two tests interact — the effect on the current ratio at the same time.
All from the worked balance sheet and income inputs: EBITDA $390,000, debt service $170,000, cash capex $60,000, distributions $150,000, current assets $1,170,000, current liabilities $860,000, line balance $250,000. The equipment loan is stated as $18,000 a year of payments on $60,000 over four years, with $15,000 of principal in its first year. FCCR = (EBITDA − unfinanced capex − distributions) ÷ (scheduled principal + interest + the new loan's payments where one is added).
Cut distributions. Reducing the owner's draw from $150,000 to $80,000 lifts fixed-charge coverage from 1.06× to 1.47× and touches nothing else. It is the cure every lender proposes first, because it is the only one in which the money that was leaving the business stays in it. It is also the one owners resist, because the tax on pass-through income does not go away; a distribution cap that sits below the owner's tax liability is a covenant that will be breached next year by design, and the honest negotiation is a cap defined as tax distributions plus a stated amount.
Finance the capital expenditure instead of paying cash. The $60,000 truck and cooler, put on a four-year equipment loan with an $18,000 annual payment, leaves the $60,000 in cash and adds $18,000 to fixed charges: fixed-charge coverage goes to 1.28× and the current ratio, with $60,000 more cash against $15,000 more current portion, rises to 1.41. This is the cure that costs the least and is proposed the least, because most owners do not think of a truck they paid for last March as a covenant decision. It was. Equipment that will run for seven years financed over four is a good match of term to useful life, and the cost is usually below the line's rate — equipment financing is the one product where the asset itself does the underwriting.
Do both. Distributions to $80,000 and the capex financed: 1.65× and a current ratio of 1.41. This is the package a lender writes into the waiver, and it is the package a borrower should propose before being asked.
Term out the line — and watch what it does. The lender's favourite cure for a current-ratio breach is to convert the $250,000 revolving balance into a five-year term loan. The current ratio leaps to 1.77. Fixed-charge coverage falls from 1.06× to 0.82×, because $50,000 of new scheduled principal has joined the denominator and nothing has joined the numerator. A cure that repairs one test by breaking another is not a cure, and the number of small businesses that have termed out a line to satisfy a balance-sheet covenant and then failed the coverage covenant four quarters later is not small.
Contribute subordinated debt. The owner's $70,000 loan lifts the current ratio to 1.44 and does nothing for fixed-charge coverage, because the cash arrived below the EBITDA line. It cures a working-capital or current-ratio breach and is the natural equity cure for those; it is not a coverage cure unless the agreement's equity-cure clause deems it one.
Earn it. To reach 1.10× on the existing structure, the numerator needs to be $187,000 (1.10 × $170,000), which means EBITDA of $397,000 — an increase of $7,000, or 0.12 of a margin point on $6 million of revenue. It is the cheapest cure of all and the only one that cannot be done by the test date. It goes in the plan, not the waiver.
What does not get granted: a waiver in exchange for a promise, a cure funded by another lender's money that lands as a current liability, and — almost always — a request to redefine the covenant after the breach rather than before it. The time to negotiate the definition of EBITDA is at the term sheet.
We do not write financial covenants. There is no current-ratio test in a Full Send Funding agreement, no minimum working capital, no compliance certificate, no annual audited statements. It is worth being precise about what replaces them, because it is not nothing.
The remittance is the covenant. A revenue-based facility is sized from the bank account — funding of 80% to 150% of average monthly revenue — and paid back as a fixed daily or weekly debit. The question a bank asks once a quarter with a certificate, we ask once a day with a debit: is there cash in the account. A business that can clear its remittance out of ordinary deposits every day is in compliance; one that cannot is having the conversation immediately, not forty-five days after quarter end. The discipline is the same, the instrument is different, and the instrument has no test date to pose for.
Deposits, not EBITDA. We size against three or more months of bank statements — average daily balance, deposit consistency, negative days and the debits already leaving the account — rather than against a financial statement. The reason is the one this article has been circling: EBITDA is a presentation, and distributions come out of it before anyone tests it. Deposits are what actually happened. The bank-statement signals that decide a file are the whole underwriting.
The worst-week test replaces fixed-charge coverage. Set the proposed remittance against the worst normal week of the last year — not the average week — and confirm it clears with room. That is the check that decides whether an amount is right regardless of what was approved, and it is a coverage test in the same family as fixed-charge coverage, applied to the granularity at which a small business actually lives. A distributor with $6 million of revenue and a $500,000 average month whose worst normal week saw $70,000 of deposits should not carry a weekly remittance above a small fraction of that, whatever the twelve-month numbers say.
Existing positions replace the debt-service denominator. Other advances or facilities already drawing on the same deposits are visible in the statements as recurring debits, disclosed or not, and total debt service is measured against revenue before a new remittance is sized. That is the analogue of the DSCR denominator, read from the account rather than from a schedule.
What it costs and what it does not. Our cost of capital runs from 4.5% to 45% depending on qualifications and term, on terms from four months to three years, with funding from $5,000 to $10 million and a revolving business line of credit from $10,000 to $2 million. We file no UCC-1 lien against the business and our agreements contain no confession of judgment, which matters here specifically: a blanket lien from a second funder — the security-interest clause in most advance agreements — is itself a covenant breach under most of the bank agreements we have read, through the negative-pledge clause, and a revenue-based facility that files one can put a borrower in default with the bank the same week it funds. The full account of how we are paid is on how we make money.
The honest comparison is this. A bank line is cheaper, and its covenants are the price of that cheapness — a set of conditions that let the bank withdraw the money when the business most needs it. A working capital facility sized against deposits is dearer, and its price buys the absence of those conditions. Neither is the right tool for every job.
There is a specific and common mistake at the intersection of these two worlds, and because it is in our interest to make it, it belongs in our article.
Do not cure a covenant breach with an advance. Take the distributor's failing fixed-charge test and suppose the owner, rather than cutting distributions, takes a $150,000 advance with a $195,000 payback over eight months to "shore up working capital before the bank looks". Two things happen to the covenants.
The current ratio goes down, from 1.36 to 1.31: the $150,000 arrives in cash and a liability of the same amount arrives on the other side, and adding equal amounts to both sides of a ratio above 1.0 pulls it toward 1.0 — the same arithmetic as the line draw above. The working-capital covenant is unchanged. And fixed-charge coverage collapses: the $195,000 of remittances over the next twelve months joins the denominator, which goes from $170,000 to $365,000, while the numerator is untouched. Coverage falls from 1.06× to 0.49×.
The borrower has taken on the most expensive capital available to them, made the balance-sheet covenant slightly worse, made the coverage covenant much worse, and — if the funder filed a UCC-1 — breached the negative-pledge clause as well. This is the stacking mechanism wearing a bank agreement, and the bank will find the debits in the statements it already receives. The right cure for a coverage breach is the one in the table: less money leaving, a capex financed, a plan for the $7,000.
Do not use revenue-based funding where a bank will lend. If the business has two years of clean statements, stable EBITDA, an owner who can live inside a distribution cap and a purchase with a life longer than the loan, the covenanted bank facility is the right instrument and its covenants are a fair price. We would rather tell you that than fund a file that a bank should have.
Do not fund a structural loss with either. A covenant breach that comes from a business spending more than it makes in a normal month is not a covenant problem, and no cure in the table fixes it. When borrowing is the wrong answer is the honest reading of that file, from a funder.
Do use it for the timing gap the covenant will not tolerate. Where the breach is a snapshot problem — a seasonal inventory build that lifts current liabilities at the wrong quarter end, a large customer's payment landing a week after the test date, a bank in reservation-of-rights mode declining to advance on a line the business has not misused — a facility with no test date, sized against deposits and repaid from them, is the tool. In the Federal Reserve Banks' 2026 report on employer firms, 56% of those that sought financing did so to meet operating expenses,[3] which is what a timing gap looks like from the inside; and 42% of applicants received the full amount they sought, 36% some or most of it, and 22% none,[3] which is what a covenant-constrained bank relationship often looks like from the outside.
A financial covenant is a promise about future numbers, tested from your own statements on a date in the agreement, and breaching it is a default whether or not a payment was missed. On one worked balance sheet — a $6 million distributor with $1,170,000 of current assets, $860,000 of current liabilities, $390,000 of EBITDA, $170,000 of debt service, $60,000 of cash capex and $150,000 of distributions — the current ratio is 1.36, working capital is $310,000, debt service coverage is 2.29× and fixed-charge coverage is 1.06×. Three pass. The last fails, because it counts the cash that left the business before the bank was paid, and it is the one that tells the truth.
The current ratio can be lifted by paying payables from cash or terming out the line, and neither changes the business; it is untouched by collecting receivables early, which does. Terming out a line to fix a balance-sheet covenant breaks the coverage covenant by the amount of the new principal. The cures that are actually granted are a distribution cut, financing the capex, subordinated owner debt, or a combination — and never another lender's money landing as a current liability, which makes both tests worse. A revenue-based facility replaces the covenant with the remittance, sized against deposits and the worst normal week rather than against EBITDA; it is the wrong cure for a coverage breach and the right tool for a timing gap the bank's test date will not tolerate.
If you want to know what your deposits, rather than your ratios, would produce, check what you would qualify for — a minute, a soft credit pull only — or call 518-312-0382 and ask.
Every number in the tables and figures is derived from one stated balance sheet — cash $120,000, receivables $540,000, inventory $480,000, prepaids $30,000, payables $410,000, accruals $90,000, a $250,000 line balance and $110,000 of current term-loan principal — and one stated year: EBITDA $390,000, interest $60,000, scheduled principal $110,000, owner distributions $150,000 and $60,000 of capital expenditure paid from cash. The covenant tests, the sensitivity of both coverage ratios to a decline in EBITDA, the six balance-sheet moves and the cures are each computed from those inputs and nothing else, using the formulas stated beside them; the site's arithmetic audit recomputes every published value before publication, and any input can be replaced with a reader's own. The balance sheet is illustrative and is not a client's.
The covenant thresholds (current ratio 1.25, working capital $250,000, DSCR 1.25×, FCCR 1.10×), the waiver-fee range, the compliance-certificate timing and the equity-cure pattern describe what appears in the bank term sheets and agreements that borrowers bring to the firm; they are practice, not a measured distribution, and there is no public dataset of small-business covenant terms from which one could be drawn. The SBA's 2026 retirement of the SBSS pre-screen for 7(a) Small Loans, and its instruction that lenders apply their non-SBA credit analysis instead, is stated from the SBA's procedural notices as they read at the time of writing;[1][2] the SBA's numeric floors — 1.0× for 7(a) Small Loans of $350,000 or less and 1.15× above — are stated from the SBA's information notice issuing SOP 50 10 8,[4] and are distinct from the illustrative 1.25× DSCR and 1.10× FCCR bank thresholds in the worked example. The waiver-fee range, the share of first breaches that end in a waiver, the compliance-certificate timing and the negative-pledge consequence of a second lien are the firm's experience and common practice, with no public dataset behind them. The two survey figures are quoted from the Federal Reserve Banks' 2026 report on employer firms, a nationwide convenience sample of firms with fewer than 500 employees, and are offered as scale rather than as evidence about covenants, on which the survey does not report.[3]
A promise in the loan agreement to keep a stated ratio or amount inside a stated limit — a current ratio above 1.25, working capital above $250,000, debt service coverage above 1.25× — tested from your own financial statements at set dates for as long as the loan is outstanding. Breaching one is a default under the agreement whether or not a payment has been missed, with the same remedies on the page as a missed payment.
Both divide by scheduled principal plus interest. DSCR uses EBITDA as the numerator; fixed-charge coverage first subtracts the charges the business cannot skip — cash taxes, unfinanced capital expenditure and owner distributions. On the worked example the same business shows a DSCR of 2.29× and a fixed-charge coverage of 1.06×, because $210,000 left the business before the bank was paid.
The breach is an event of default on the test date. In our experience most first breaches end in a waiver rather than an acceleration, but a waiver is priced — a fee on the outstanding balance, a rate increase until the next clean test, and an amendment that tightens something, such as a distribution cap or a monthly test. Between the breach and the waiver a reservation-of-rights letter usually means the line has become a day-to-day facility.
By a change the agreement recognises, made inside the period it allows: a cut in distributions, financing a capital expenditure instead of paying cash, a subordinated loan from the owner, or an equity cure where the agreement grants one. On the worked example cutting distributions from $150,000 to $80,000 lifts fixed-charge coverage from 1.06× to 1.47×; terming out the line lifts the current ratio to 1.77 and drops coverage to 0.82×.
Yes, and it changes nothing about the business. Paying $100,000 of payables from cash on the worked balance sheet takes the ratio from 1.36 to 1.41, because a ratio above 1.0 rises when both sides shrink by the same amount. Drawing on the line to hold cash does the opposite, to 1.32. Collecting receivables early, which genuinely improves liquidity, leaves the ratio at 1.36.
No, and it usually makes both tests worse. A $150,000 advance with a $195,000 payback lands as cash on one side and a current liability on the other, which lowers the current ratio from 1.36 to 1.31, and its $195,000 of remittances over the next year join the coverage denominator, taking fixed-charge coverage from 1.06× to 0.49×. A funder that files a UCC-1 also breaches the negative-pledge clause found in most bank agreements we see.
No. There is no current-ratio test, minimum working capital, compliance certificate or annual statement requirement. Funding is sized from three or more months of bank statements at 80% to 150% of average monthly revenue, the remittance is set against the worst normal week rather than against EBITDA, and we file no UCC-1 lien and use no confession of judgment. Cost of capital runs from 4.5% to 45% depending on qualifications and term.
Travis Yule founded Full Send Funding in 2021 and leads it from Middle Grove, New York. He writes about working capital from the underwriting side of the table — what the numbers actually have to say before a business gets funded.