With rising interest rates, it’s important for commercial borrowers to know their loan covenants! Get out your loan documents and review them — it’s time!

The commercial lending market is a multibillion-dollar industry. Commercial lending can be for commercial real estate, equipment purchases or when a company borrows money for operating cost. Commercial loans usually have a balloon payment, or the loan will reset every few years.

In addition, a lender will usually review the company’s financial statements on a yearly basis, to make sure that the company is meeting the covenants of their loan agreement.

With rising interest rates, you will most likely see commercial loans being called for a violation of the loan covenants. Some borrowers will no longer meet the DSCR requirement based off the higher interest rate and lenders will be asking for their money back.

Borrowers should be meeting with their CPAs, Financial Planners, Attorneys and reviewing the covenants of their loan agreements so they can be prepared and not caught off guard.