2 min read
Definition
A loan covenant is an undertaking in a loan agreement that the borrower will do, or refrain from doing, certain things. Financial covenants require maintaining ratios such as interest cover; non-financial covenants require actions like timely reporting.
In plain terms
They're the rules attached to the money. Break one — a covenant breach — and the lender may act, even if you're paying on time.
Why it matters for your company
Understand every covenant before signing and monitor them through the loan. See loan covenants and reading a loan agreement.
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