A director's guide to loan covenants and monitoring

Covenants are ongoing promises

When you sign a facility, you often agree to financial covenants — commitments to keep certain ratios within limits for the life of the loan. These aren't one-off checks; they're tested repeatedly. Miss one and you can be in breach even with every payment made on time. The first job is simply knowing exactly what you've promised.

The ratios you'll typically watch

Common covenants include a minimum interest cover, a maximum gearing ratio, a minimum net worth, or a debt service cover floor. Each translates a lender's comfort into a number you must stay the right side of. Build these into your regular management reporting so they're never a surprise at a testing date.

Monitor before the lender does

Check your covenant ratios every time you produce management accounts, not just at formal testing points. Watching the trend — a ratio drifting toward its limit — gives you months to act rather than a nasty surprise on test day. Directors who monitor covenants control the conversation; those who don't get caught out.

If a breach looms, talk early

If a covenant is heading for breach, the worst move is silence. Lenders react far better to a director who flags a looming issue early, with a plan, than to one who breaches unannounced. Often a waiver or reset can be agreed if you raise it in good time. Early, honest communication is your best tool — it's also part of your duty to run the company well.

Choose covenants you can live with

The best defence starts before signing: only accept covenants you can realistically keep across good and bad quarters, with headroom for a dip. Negotiate them at the outset, when you have leverage. And read the whole agreement — see reading a loan agreement. Test the affordability behind it with the affordability calculator.