Loan Covenant
Definition
A condition in a loan agreement that your business must meet, such as keeping a minimum DSCR, maximum leverage or delivering financial statements on time.
Want a deeper explanation?
Covenants are easy to agree to and easy to forget. Breaking one can let the lender raise rates, demand repayment or freeze your line.
Timely monthly books let you test covenants before the bank does. Watch for: reporting deadlines in the loan agreement, because late financials can be a breach on their own.
Example
Your bank requires a DSCR of at least 1.25, tested quarterly. A weak Q1 pushes it to 1.1, putting you in technical default even though every payment was made.