Q: Why would Larry Crevin agree to a Covenant if he does not need a renewal?
A: Until he fully pays down the line and has no further obligation to the lender, and he is subject to covenants and conditions imposed by the lender and agreed to by Larry Crevin. If he refused to honor an existing covenant required by the lender, the lender may well decide to reject the renewal and call the line as due and payable on its renewal date. This assumes, of course, that Total Coverage needs the short-term financing and does not have the cash resources necessary to liquidate the line.
When we get to projections, we'll be able to determine whether Larry Crevin needs to renew the line. Renewal (or refinancing) of the line is the most likely situation given the growth and the 2018 cash flow deficit. If Total Coverage generated a sufficient cash flow surplus to fully pay down the short-term balance of the line at the end of 2018, they would not need to renew – a daunting task.
Course overview: Cash Flow Analysis and Borrowing Causes