What Happens When NZ Businesses Breach Bank Covenants?
One thing I’ve noticed over the past few years is that many NZ businesses assume banking relationships stay stable as long as the business is still operating profitably.
In reality, that’s not always how banks assess risk.
I’ve seen situations where businesses still had strong customers, solid revenue, and valuable assets, but increasing pressure around banking covenants slowly created a much bigger problem behind the scenes.
And often, it starts gradually.
What Are Bank Covenants?
Most larger commercial banking facilities come with conditions attached to them, commonly referred to as covenants. These are financial requirements businesses are expected to maintain while the bank facility is in place.
Typically, banks are monitoring things like:
equity ratios, (how much equity the shareholders have left in the business versus debt levels)
balance sheet strength,
profitability,
debt servicing ability (whether the business is comfortably generating enough cash flow to meet lending repayments),
and overall financial stability.
As long as the business continues operating within those agreed parameters, the banking relationship generally remains stable.
But when trading conditions tighten, margins reduce, or growth places pressure on working capital, businesses can sometimes begin drifting outside those covenant requirements.
Covenant Breaches Don’t Always Mean The Business Is Failing
One of the biggest misconceptions I see is that covenant breaches automatically mean a business is collapsing.
That’s often not true at all. In many cases, the business is still operating well commercially. The problem is usually that growth, cash flow timing, asset values, or balance sheet pressure no longer fit neatly inside the bank’s risk framework.
I’ve seen businesses breach covenants because:
stock levels increased heavily during growth, (front running a feared new wave of Covid)
debtors stretched payment terms, (cash stuck in invoices)
margins tightened temporarily, (US-IRAN war increasing costs globally)
or large projects created short-term working capital pressure.
Sometimes the business is actually growing rapidly while simultaneously becoming less attractive to the bank from a covenant perspective.
That creates a difficult situation for management teams because operationally the business may still feel healthy, while financially the banking relationship becomes increasingly stressed.
What Happens When Breaches Continue?
From what I’ve seen, banks are usually supportive initially if covenant breaches are isolated and there’s a clear pathway back to stability. But repeated breaches tend to change the tone of the relationship over time.
Eventually, businesses can find themselves under increasing pressure from the bank to:
reduce debt exposure,
improve balance sheet position,
inject additional equity,
sell assets,
or refinance elsewhere.
In more serious situations, businesses may effectively be told they need to find an alternative funding structure altogether. That can become incredibly stressful for directors and accountants, particularly when the business itself is still fundamentally viable.
And this is where many NZ businesses start realising that traditional bank structures are not always designed for every stage of a company’s growth cycle.
Why Working Capital Solutions Can Help
One thing I’ve seen work well in some situations is separating the working capital requirement from the longer-term asset lending. Rather than trying to fully replace the banking relationship, businesses can sometimes restructure part of the funding stack.
For example, the bank may continue holding the property or asset-backed lending, while a specialist funder supports the working capital side of the business through debtor finance or invoice finance facilities.
That can immediately improve pressure around:
overdraft utilisation,
liquidity,
and short-term cash flow strain.
At Pacific Invoice Finance New Zealand (PIFNZ), we regularly work with businesses where the issue is not necessarily profitability, but timing and working capital pressure.
By unlocking capital tied up in receivables, businesses can often create breathing room while maintaining their existing asset relationship with the bank. In many cases, that creates a far more stable overall funding structure.
Restructuring Early Usually Creates Better Outcomes
One thing I’ve consistently noticed is that businesses that address covenant pressure early usually have significantly more options available to them. Once relationships become highly stressed, decision-making often becomes reactive.
But when management teams and accountants identify pressure early, there’s usually more flexibility to restructure facilities, improve liquidity, and stabilise the business before things escalate further.
In my experience, many NZ businesses facing banking pressure are not bad businesses. Often they are simply businesses that have outgrown the structure their original banking facilities were built around.
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