Defending the ratio at bank review.
A turnover change is not just a metric. It moves DSCR, current ratio, and the borrowing base. The trick is bringing the working-capital release into the covenant conversation.
The covenant mechanics
Most commercial loan agreements carry a debt-service coverage ratio (DSCR) and a current-ratio covenant. A turnover lift releases inventory cash that pays down revolving debt; the pay-down lowers interest and lifts DSCR. The current-ratio direction depends on whether the released cash sits as cash (favourable to the numerator) or pays down current liabilities (favourable to the denominator).
Illustrative. Run the inputs against your own loan agreement covenant formulas before the review.
Bring to the meeting
- Turnover trailing-twelve-month chart with the most recent two quarters highlighted.
- Industry median from the atlas, cited.
- Working capital release model from the impact calculator.
- Action plan referencing steps 2 through 5 of this playbook.
- Pro-forma covenant calculation under the new ratio.
What lenders look for
Language to use: “The trailing-twelve-month ratio is below industry median by X percent. Steps 2 and 3 of the operating plan lift the ratio to median over two quarters, releasing $Y of average inventory. That release lands as a revolver pay-down of $Y, lifting projected DSCR from N.NN to N.NN.”
Covenant defence
Bring the working-capital release model and the industry-median comparator.