Financial distress in small firms: the role played by debt covenants and other monitoring devices

Taylor, Peter and Day, Judith (2001). Financial distress in small firms: the role played by debt covenants and other monitoring devices. The Insolvency Lawyer, 3 pp. 97–113.

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Abstract

Survey of bank data detailing devices used to determine lending criteria employed in cases of 24 anonymous small and medium sized enterprises in clothing and media sectors suffering varying degrees of financial distress.

In this article we outline the main findings of a research project that examined the lending details of a sample of small to medium-sized companies extracted from the files of a U.K. bank. [FN1] All the companies selected had been or were currently experiencing various forms of financial distress. Our analysis focuses on the size and nature of the debt facilities provided including the presence or absence of various financial covenants; considers the causes of the difficulties experienced by each company; and discusses the role played in the management and eventual outcome of each case by the financial and non-financial covenants.

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