Common financial covenants
| Covenant | Purpose |
|---|---|
| Debt-service coverage | Measures cash available relative to required debt payments |
| Leverage | Limits debt relative to equity or earnings |
| Minimum liquidity | Requires cash or working capital cushion |
| Net worth | Requires a minimum capital base |
Reporting covenants matter too
Borrowers may need to deliver annual tax returns, quarterly statements, borrowing-base certificates, insurance evidence or compliance certificates by specific deadlines.
Negative covenants restrict actions
Credit agreements may limit new debt, liens, acquisitions, distributions, ownership changes or asset sales without lender consent.
A breach does not always mean immediate foreclosure
The agreement defines remedies. A bank may waive, amend or reset a covenant, often for a fee or with additional conditions, but the borrower should communicate before—not after—the breach.
Build covenant monitoring into monthly reporting
Track covenant calculations internally using the same definitions as the credit agreement. Forecast them several months ahead so management can respond before a technical default occurs.
Primary sources and reference material
Structure the financing around the business problem.
Good borrowing matches purpose, repayment source, maturity, collateral and liquidity. Compare the entire credit structure—not a single rate, speed claim or headline loan amount.