Failure to meet loan covenants

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#1
CO CPA  
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I have a client that really struggles with not sinking his business in massive amounts of debt. When I met him three years ago he had huge amounts of credit card and bank debt for equipment. We wrapped all of his debt up into an SBA loan at a low rate. I tried to drill into his head (verbally in meetings) that he cannot take on additional debt without discussing it with the bank that holds the SBA loan because there are loan covenants he must meet.

Fast forward to today and I'm updating his books and he bought a bunch of equipment on loans with a different bank. I reached out to him and asked him if he considered the covenants when he took on additional debt. Covenants? What are loan covenants? You never told me about this. My response: I did tell you about it multiple times and the bank tells you every year when they request your financial statements as part of their annual review process to ensure covenants are met. You also signed the SBA loan promissory note which explains the covenants.

You just can't help this guy. His business would be killing it if he would just stop buying hundreds of thousands of dollars of equipment he doesn't need. Anyway...I have no liability on this issue should they call his loan, right? It's not my fault that he didn't read or care to remember to document he signed. I wish I had an email to back up the fact that we discussed this multiple times.
 

#2
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You arent liable for his failure to meet his loan covenants.
 

#3
eze  
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A conversation like the would be a "former" client.

Anyone can tell a sob story to an attorney and sue you for anything.....but it doesn't sound like you did anything wrong.

Continuing with the client.... would be wrong IMHO. Not legal advice....just life experience.
 

#4
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Bushmaster wrote:You arent liable for his failure to meet his loan covenants.


I agree that you are not liable. If you advise him again of this, I think it would be a good idea to advise the client by email and I would use email for other important pieces of advice you give to any client. It's a lot more powerful than oral advice whether you want to show a client you documented previous advice or if you are involved in litigation. Again, though, in this case I see no liability on your part.
 

#5
CO CPA  
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keninmichigan wrote:
Bushmaster wrote:You arent liable for his failure to meet his loan covenants.


I agree that you are not liable. If you advise him again of this, I think it would be a good idea to advise the client by email and I would use email for other important pieces of advice you give to any client. It's a lot more powerful than oral advice whether you want to show a client you documented previous advice or if you are involved in litigation. Again, though, in this case I see no liability on your part.


Thanks Ken for your thoughts. I sent him an email months ago. He did not give advance notice to the bank. They'll figure it out soon when they review his financials for 2022...
 

#6
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Is he needlessly buying equipment to try to max out Sec. 179?

They'd become a former client. I don't want my name even remotely associated with a called loan or failed company.
 

#7
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I would drop the client. They don't listen to advice and are high risk. This isn't a good client.
 

#8
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Totally agree. Client would be a former client
 

#9
CO CPA  
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CornerstoneCPA wrote:Is he needlessly buying equipment to try to max out Sec. 179?

They'd become a former client. I don't want my name even remotely associated with a called loan or failed company.


Yes. He does it because he's "expanding" but no expansion is ever realized. They're still cash flowing well but would cash flow a lot better if they weren't constantly buying new equipment. I've tried to provide advice and it falls on deaf ears. Oh well.

I don't feel like called loan or failed company are imminent. Please let me know if I should be thinking more about letting them go...
 

#10
TheGrog  
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Is he committing some kind of fraud? Or does he just have a storage shed full of mostly unused equipment? Has to be one or the other, unless there is some kind of hilariously bad trade in deals happening.
 

#11
CO CPA  
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TheGrog wrote:Is he committing some kind of fraud? Or does he just have a storage shed full of mostly unused equipment? Has to be one or the other, unless there is some kind of hilariously bad trade in deals happening.


Hilariously bad trade-ins for the most part. Always needing the best, brand new equipment. It's a lawn care company and he gives 25 year old kids brand new Tacoma pickups.
 

#12
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Have a client that has millions in heavy duty equipment. He buys new stuff all the time that I would probably not. His theory is a new piece of equipment doesn't get abused as much as a hunk of junk. Think broken windows philosophy on equipment. He also only lets them drive certain equipment in 2nd gear max.

Newer equipment comes with warranty, less breakdowns, less maintenance requirements, etc. All equals more production and more money and more equity in the equipment. If he is cash flowing well there shouldn't be a problem. The problem is going to come if the bank calls his loans, but if he is meeting his loan payments, that shouldn't happen. Most banks do not want to be in the lawn care business.
 

#13
deniz  
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Its not a good idea to hang onto uncooperative clients, but If you want to keep the client, I would scope your responsibilities by adding a corporate attorney referral to your documentation letter. Indicate that loan covenant defaults are a matter of corporate law, not tax law and will need to be sorted out by legal counsel.
 


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