Loan Covenant

Category: legal

A binding legal clause in a loan agreement requiring the borrower to maintain certain financial baselines.

Covenants act as "tripwires." Positive covenants require actions (e.g., providing audited financials annually). Negative covenants restrict actions (e.g., capping total executive salaries or banning additional debt). If a covenant is breached, the bank can declare a technical default.

Common Examples

• The restrictive loan covenant prevents us from taking on secondary equipment leases without the primary bank’s written authorization.
• Breaching the liquidity ratio loan covenant allowed the lender to adjust our interest rate upward by two hundred basis points.