Australia: Tis' the Season – for cashflow lending - Is there a case for seasonally adjusted covenants?

Last Updated: 30 November 2016
Article by Roger Mattar


Tis' the festive season and retailers everywhere are breathing a collective sigh of relief that registers are ringing out loudly again across the town. It's easy to forget though, somewhere between EOFY sales and Christmas, a common issue for retailers is that their spending is up (preparing inventories for the festive season) and consumer spending may be down. If financing these higher costs cannot be achieved internally, banks are often called upon to help their customers finance their working capital needs. This type of financing is often referred to as cashflow lending.

Cashflow lending is based on a series of promises and specific financial covenants (or metrics) relating to the business and its performance (typically earnings). It aims to ensure that the cashflows of the borrower from its revenue are in step with the payment obligations under its financing arrangements.

Banks set their covenants against past financial performance, reasonable assumptions and projections and with reference to industry or bank standard measures. A key consideration from both bankers and borrowers will also be the issue of seasonality of performance or 'lumpy' cashflows. This is not just a question for retailers but a question across many industries. In this note, we consider whether there is actually a case for preparing and including seasonally adjusted covenants in a cashflow lending context.


Retailers provide a great example of a business with seasonal or cyclical working capital requirements but they are not alone – consider farmers, trades people, even lawyers and accountants. The working capital requirements across all of these sectors can vary greatly as a result of seasonal or cyclical macroeconomic factors.

Some businesses are able to finance their working capital requirements internally. More often than not though, Australian businesses seek to fund their working capital requirements via overdraft or other revolving working capital facilities from the banks. This type of finance, for working capital or other general corporate purposes, is often referred to as "cashflow lending".

Cashflow Lending

At its simplest, cashflow lending is predicated on an agreement by a lender to fund certain business activities of a borrower because of its current (and continued/forecast ) financial performance and in return for promises from the borrower to use that money in a specific way and not to do certain things to its financial resources. Central to those promises are certain financial covenants which the lender will periodically test to ensure that the borrower is performing against those covenants. Typical cashflow lending financial covenants are:

  • a fixed charges covenant - eg. committed repayment and other interest obligations under all loans of the borrower to EBITDA of the borrower;
  • an interest cover covenant - eg. committed interest obligations under all loans of the borrower to EBITDA of the borrower; and
  • a minimum net worth covenant -eg. minimum tangible net assets.

Cashflow Covenants and the Seasonality Question

The fixed charges and interest cover covenants aim to test the ability of a borrower to meet its obligations to repay its loans (together with interest and other charges on those loans) from its earnings and it is these covenants that we are concerned with when considering the effect of seasonality.

Revenue may fluctuate with seasons or in accordance with certain macroeconomic factors affecting the business or industry more broadly. Banks, when setting these financial covenants have their own internal models, from which they create a model specific to the borrower's business by inputting the borrower's past (and often projected) financial information from its financial statements, which then leads the bank to set an appropriate covenant level. An appropriate covenant level should be a covenant that will only be breached when the borrower has reached a level of financial performance which is unacceptable to the bank's risk profile for that borrower. The financial covenant is likely to then include an agreed level of headroom (to allow for deviations in actual performance to forecast performance), to be applied and tested across the entire reporting period (being typically a 12 month period), which leads to the issue: should the covenants be adjusted up and/or down over different reporting periods to reflect the seasonal or cyclical nature of a business?

Seemingly, there is a very good case for seasonally adjusted covenants. Borrowers should not breach their financial covenants simply because the financial covenants haven't included sufficient headroom to account for variations in performance which are due not to the operating performance of the business but rather due to the structural or cyclical environment within which the business operates (and which affect all businesses in that market).

Why then, do so few loans actually contain this type of adjustment? The answer, we think, may be:

  1. That banks set covenants with reference to individual historic and projected performance but also in line with bank and industry standards;
  2. That the headroom agreed in the covenants is adequate to account for seasonal adjustments to earnings and so outweighs cost/benefit for the bank to spend additional time and effort on tailoring covenants to monthly or quarterly reporting periods (where reporting information is limited to management accounts only, which may be less accurate than annual information prepared and audited by accountants);
  3. The level and sophistication of modelling and information required across a spectrum of industries may not be available.

End of Season Sell-out

Do we think there is really a case for seasonal covenants? Theoretically, yes, it makes perfect sense. Of course, pragmatically, in the SME/mid market environment, modelling covenants to that degree may be impractical and a more standardised approach with a proper consideration of requests for adequate headroom are probably adequate for most purposes. An alternative may be to have a provision which creates a 'Covenant Review' based on seasonal variations to cashflow.

Beyond that, borrowers and banks need to continue to work together to ensure that the most appropriate covenant package is structured for the nature of the business and its risk profile. Perhaps, not too far down the track, with big data, cloud computing and real time reporting, financial modelling may become more tailored and customer centric and the case for seasonally adjusted covenants may become more compelling.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Kemp Strang has received acknowledgements for the quality of our work in the most recent editions of Chambers & Partners, Best Lawyers and IFLR1000.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Roger Mattar
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.