In times of market volatility or uncertainty, as is the case with the current state of the economy, lenders must have more control over managing and addressing potential risks. This is where financial covenants come in.
Financial covenants, like Loan-to-Value (LTV) ratios, Debt Service Coverage Ratios (DSCR), and Liquidity and Tangible Net Worth tests, are critical for a lender to assess the underlying strength of its collateral and the borrower’s and/or guarantor’s financial situation on a periodic basis during the life of a loan. These and similar covenants help lenders track unfavorable changes in the collateral and loan parties supporting their loans so they can address potential financial instability before it escalates into bigger problems.
Why Now is the Right Time to Introduce or Expand Financial Covenants
As we look ahead to 2025, we’re already seeing unpredictable market shifts—from rising Treasury yields and fears of limited or no further interest rate cuts to increasing uncertainty around inflation and certain sectors of the real estate market. The federal funds rate outlook, for example, has changed dramatically in just the first two months of the year, causing turmoil across markets. Additionally, with a significant portion of commercial loans maturing this year, refinancing and investment opportunities will open new doors—but they also introduce new risks.
Now, more than ever, it’s crucial to introduce or expand your financial covenants. This will give you greater control and allow for quick, informed decision-making as the market continues to evolve. Whether it’s understanding the strength of a collateral property or assessing the borrower’s and guarantor’s respective financial health, having these covenants in place gives lenders the tools to monitor and manage risk effectively.
Why Having Financial Covenants Isn’t Enough—You Need to Monitor Them
While having financial covenants is essential, active monitoring and intervention are what sets successful lenders apart. Many banks and other financial institutions with strong portfolios are those who have the tools to stay ahead of market and economic changes and can inspect and assess the values of their collateral regularly, monitor the financial strength and engage with borrowers and guarantors, and work with the loan parties to find solutions to potential issues of concern. It’s not just about having covenants; it’s about using them as a tool to identify and address risks before they grow.
For example, if a lender suspects that a property’s value may have decreased, they don’t immediately call in an appraiser—they can inspect the property and engage with the borrower first. Then, they can appraise the value of this asset to determine compliance with a required LTV test, require a principle paydown to re-balance the loan, and open the door for further communications and problem-solving with the borrower. This proactive approach can prevent long-term issues and ensure that lenders are not caught off guard.
What GoDocs Offers
GoDocs is here to help you streamline this process with no limits on customized financial covenants, something other vendors don’t offer. We offer a range of market-standard financial covenants—such as LTV, DSCR, Liquidity and Tangible Net Worth tests, Fixed Coverage Charge, Debt Yield and other similar tests—that many of our banking and credit union clients use off the shelf. But what sets us apart is our ability to craft custom financial covenants tailored to meet your specific needs, with no restrictions on the number of such covenants you can include in your document packages.
In addition to our financial covenant capabilities, we’ve also expanded our abilities to manage insurance clauses for scenarios where coverage may become overbearingly expensive or unavailable. This feature is particularly important in high-risk markets or areas that may be impacted by climate change or natural disasters.
Whether you need off-the-shelf solutions or fully customized financial covenants, GoDocs offers the flexibility and scalability to support your risk management strategy. With our seamless integration and expert support, you can actively monitor these covenants and make informed decisions, helping you stay ahead in these uncertain times.
Take Control of Your Risk Management
Now is the time to take action. Don’t wait until issues become bigger than they need to be. Explore how GoDocs can help you monitor and manage your financial covenants effectively. Contact us today for a demo and see how our solution can give you the control and flexibility you need to thrive in today’s unpredictable market.
Head of Business Strategies & Partnerships
Regulatory updates, such as Florida’s witness signature requirements, are reshaping how lenders, title companies, and other stakeholders approach commercial mortgage lending and real estate transactions, requiring them to stay agile and informed.
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