Overview

A covenant breach letter is usually concise but consequential: it identifies the covenant(s) the lender says you’ve violated, cites the supporting loan agreement language, and states a cure period or next steps. Treat the letter as a time-sensitive legal and financial document—not mail to ignore. Responding on time and with evidence can preserve your borrowing relationship and reduce the chance of enforcement (e.g., default, higher rates, or collateral actions).

Why lenders send these letters

  • To protect their collateral and repayment prospects.
  • To trigger contract remedies or require corrective actions.
  • To document notice before escalatory steps (acceleration, foreclosure, or demand for additional covenants).

Initial practical steps (first 7 days)

  1. Read the letter closely and note deadlines. Identify which covenant(s) are cited and the cure period.
  2. Pull the loan agreement and the exact covenant language. Confirm whether the lender’s factual claims match your records.
  3. Notify your internal team (CFO, controller, legal counsel) and preserve relevant documents and communications.
  4. Draft a short, factual acknowledgement to the lender confirming receipt and that you are investigating. Don’t admit liability in that initial note.

Document review and analysis

  • Reconcile the lender’s reported numbers with your books. If the breach is ratio-based (e.g., DSCR, leverage), prepare a clear calculation showing how you computed the figure.
  • Check timing and reporting requirements—some breaches result from late reporting rather than poor performance.
  • Identify remediating events that occurred after the reporting period (e.g., new contracts, equity injections) that you can present to the lender.

Crafting your response (structure to follow)

  • Lead with a concise summary: acknowledge receipt, state whether you dispute the facts, and note any corrective steps you’ll take.
  • Provide evidence: attach reconciled financial statements, cash-flow forecasts, bank statements, and third-party confirmations as needed.
  • Offer a realistic remediation plan with milestones and dates (e.g., cost cuts, refinancing steps, forecasted inflows).
  • If you need time, request a waiver or forbearance and explain why it’s appropriate.

Negotiation and remedies

Lenders often prefer a negotiated cure over immediate enforcement. Consider these options:

  • Ask for a one-time waiver for the breach period.
  • Propose an amended covenant (e.g., temporary DSCR tolerance) with stronger reporting or fees.
  • Offer additional security (limited recourse, guarantor support) only after counsel advises.

See guidance on negotiating covenant relief and waivers here: How to Negotiate Waivers for Loan Covenants in a Business Loan (https://finhelp.io/glossary/how-to-negotiate-waivers-for-loan-covenants-in-a-business-loan/).

Communication tips

  • Be factual and concise. Avoid emotion and blame.
  • Use clear, dated documents and a single point of contact for lender communications.
  • Maintain a running log of calls, emails, and submitted documents in case of later disputes.

Real-world examples (short)

  • Liquidity shortfall: A small business reported a lower-than-required current ratio. The owner provided an updated AR aging and a committed receivable purchase agreement; the bank accepted a 60‑day waiver while collections improved.
  • Ratio miss: A developer missed a leverage covenant because one asset was misclassified. After clarifying the classification and submitting corrected schedules, the lender withdrew its enforcement threat.

Who is affected

Any borrower with a contractual covenant—commercial businesses, real estate investors, or individuals with certain secured loans—can receive a breach letter. The consequences and available responses depend on the loan type, governing law, and the lender’s policies.

Common mistakes to avoid

  • Ignoring the letter or missing cure deadlines.
  • Sending emotional or unsubstantiated denials instead of evidence-backed responses.
  • Making unilateral changes to operations that violate other covenants (e.g., shedding collateral without consent).

Practical checklist for your response

  • Acknowledge receipt in writing within 48–72 hours.
  • Confirm the exact covenant language and the lender’s calculation.
  • Supply reconciled financials and a forward-looking recovery plan.
  • Request a waiver or amendment if recovery in the cure period is unlikely.
  • Keep counsel involved for material breaches or if enforcement is threatened.

Professional insight

In my practice working with middle‑market borrowers, a short, well-documented remediation plan plus proactive communication usually preserves credit lines and avoids costly enforcement. Lenders are pragmatic—if you show a credible path to cure, they often prefer modification over foreclosure.

Tools and further reading

Authoritative sources

Frequently asked questions

1) What if I disagree with the lender’s calculation?
Provide your reconciled calculation and source documents immediately and request a call to resolve discrepancies.

2) Should I hire an attorney?
Yes, if the breach could lead to acceleration, foreclosure, or a material default. Counsel can also negotiate waivers and amendments.

3) Can a lender accelerate the loan immediately?
It depends on the loan agreement. Some agreements allow immediate remedies; others require notice and a cure period. Review your contract and consult counsel.

Closing and disclaimer

Responding quickly, transparently, and with documentation is the best way to limit fallout from a covenant breach letter. This article is educational and does not substitute for legal or financial advice. If you face a significant breach, consult a qualified attorney or financial advisor.