Colorado Lenders and State Programs

Understanding Loan Covenants on a Colorado Ranch Loan

A covenant is a promise written into a loan. Ranchers who understand theirs avoid unpleasant surprises, and those who ignore them sometimes find out the hard way.

What is a loan covenant?

A covenant is a condition in your loan agreement that you must meet or avoid. Some require you to do something, such as provide financial statements or keep insurance. Others restrict you, such as limits on new debt, selling collateral or large owner withdrawals.

Breaking a covenant can put the loan in default even if you are making every payment. That is why reading them closely matters.

Covenants often go unnoticed until something changes, such as an equipment purchase, a land sale, a new partner or a bad year. Ranchers who read them on day one tend to remember them when it matters.

Common types on ranch loans

Reporting covenants require tax returns, balance sheets and inventory reports at set times. Financial covenants set minimums for working capital, debt coverage or equity. Operating covenants limit selling assets, taking more debt, paying large dividends or changing the business.

Collateral covenants require insurance, maintenance and sometimes inspections of cattle or equipment.

Some lenders also include a cross-default provision, meaning trouble on one loan can trigger problems on others held by the same lender. Ask about this if you have several loans with one institution.

• Reporting schedules and deadlines
• Minimum financial ratios
• Limits on new debt and asset sales
• Insurance and inspection duties

Read the agreement before you sign

Ask for the draft early and ask the lender to explain each covenant. Find out how and when compliance is measured, what the cure period is and what the lender can do after a breach. Have a licensed attorney or adviser review it.

Comparing lenders matters here. Check Farm Credit, local banks, credit unions and FSA for covenant styles, and use CFPB resources on loan terms generally.

Do not be shy about asking the lender to explain legal language in plain terms. If the explanation does not match what you read, ask for the answer in writing.

Pay attention to definitions. Terms like working capital, current assets and debt service can be defined differently from how you use them in daily life, and the definition decides whether you pass. Context on farm credit conditions from Kansas City Fed ag credit surveys and USDA ERS can help you see what lenders are looking at.

Negotiating covenants

Many covenants are negotiable. Ask for measurement dates that match your income cycle, since a ranch with fall calf sales may look weak in spring. Ask about grace periods and whether a waiver process exists.

A lender is more flexible with a borrower who explains seasonal cash flow clearly. The farm finance guide covers cash flow basics.

Compare lenders on covenants as well as rates. A slightly higher rate with flexible terms may serve you better than a low rate with tight ratios that a dry year could break.

Ask whether covenants are tested on your own statements or on a lender-prepared calculation, and what values they use for livestock and crops. A change in valuation method can move a ratio without any change in the ranch.

Keeping covenants in a normal year

Put reporting dates on a calendar. Prepare financials after each season. Track working capital and debt coverage monthly if a covenant depends on it. Keep insurance current.

A simple spreadsheet and a good bookkeeper save trouble. IRS resources and your accountant help with records.

Keep a folder with every loan agreement, amendment and waiver letter. If a lender changes staff or the loan is sold, written records protect you.

If you might miss one

Call your lender before the date, not after. Bring numbers, a plan and a request, such as a waiver or temporary change. Lenders handle early warnings very differently from silence.

Drought and market drops can trigger covenant trouble in ranch country, so keep an eye on the U.S. Drought Monitor. See the rural finance guide for more.

A waiver is not automatic and may come with a fee or a condition. Ask what the lender needs to see before deciding, and give it quickly.

A last reminder

This is general education, not legal or financial advice. Ask your attorney what your specific covenants mean. For lighter reading, farm.FM has a story about ranchers and banks, with satire and agribusiness coverage.

If a covenant ever feels impossible to meet, that is useful information too. It may mean the loan structure does not fit your operation, and it is better to learn that at signing than in the middle of a drought.

Sources and further reading

• Farm Credit: cooperative agricultural lending network
• FSA Farm Loans: FSA direct, guaranteed, microloan and emergency loan information
• CFPB: consumer finance protection
• IRS: federal tax guidance
• U.S. Drought Monitor: weekly drought maps
• FDIC: deposit insurance and bank information

Ask locally: Ask a ranch-savvy attorney, your accountant and your loan officer to walk you through each covenant.

General education only, not financial, legal or tax advice, and Colorado Rancher Loan Guide is not a lender. Rates, terms and deadlines change, so confirm current details with the lender or agency.