Loan Covenant

How loan covenant works

Covenants can require financial ratios, reporting, insurance, restrictions on borrowing or limits on asset disposals. The document defines measurement dates, calculation methods, cure provisions and the consequences of a breach.

Practical UK business example

A lender requires quarterly accounts and a specified debt-service measure. The business establishes a reporting process and models the headroom before accepting the facility.

Illustrative example only; not a finance quotation or a client case study.

Why it matters

Covenants can preserve access to funding only if the business understands and monitors them alongside payment obligations.

Limitations and common misconceptions

Making every payment on time does not necessarily mean all covenants are satisfied. A breach may require consent or a waiver and can have contractual consequences even without an immediate missed payment.

Discuss business borrowing to discuss how the structure relates to your business.