Bank covenant on seller note

by a searcher from The University of Chicago - Booth School of Business

1 month ago

My deal includes both a 7A loan and a seller note.  The bank is asking that payments on the Seller note be subject to maintaining a DSCR of###-###-#### effectively a "partial standby note" (I understand that partial standby typically means a 2 year standby period.  My bank is suggesting a rolling standby where payments can be made at the end of each year if DSCR for that year is 1.25 post any payments made.)

1. How common is this type of partial standby agreement?

2. Any suggestions or experience re how to structure seller note payments while complying with such a covenant?  (Is there any better option than simply having seller note payments on standby until DSCR is proven with  the bank?)

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21 comments

searcher from The University of Chicago - Booth School of Business

I greatly appreciate the rich comments and experience shared! Thank you to all posters.

1 month ago | like reply | 0 likes

searcher from University of Western Ontario

Thanks for the tag, Luke. That type of DSC covenant applied to the note seems relatively standard practice. Hopefully, you can (or have) stated in the Note agreement, that the payments can only be made if the bank allows i.e. on-side with your covenants, post-payment. I am also assuming that the note is subordinated and/or unsecured, while the bank loan is likely secured. So, the bank just wants to make sure they get priority over any cash flow in the event that the company is breaching covenants.

1 month ago | like reply | 0 likes

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