Loan covenants: The ties that bind
Whether it’s operating lines of credit or term loans, most business loan documents include a collection of covenants. These covenants are documented agreements between the lender and the borrower as to how the borrower can and cannot conduct itself during the term of the loan contract.
For lenders, covenants accomplish the following objectives:
  • Preserve loan quality
  • Maintain adequate cash flow
  • Preserve equity
  • Continually update the picture of the borrower’s financial performance and condition.
Loan covenants may be affirmative or restrictive. Affirmative covenants are things a borrower must do while repaying its business loan such as meet its financial obligations, pay taxes, maintain a positive cash flow and be the beneficiary of a certain amount of life insurance on key owners or officers of the business. Restrictive covenants limit the borrower’s behavior in favor of the lender such as limiting additional debt, prohibiting additional liens on pledged assets or changes in management without the lender’s consent.
The stronger your business is financially, the better your position for negotiating your covenants with your lender but be mindful that you both have the same goal…
to see your business succeed.
Debbie-Prewitt-2016-smallDebbie Prewitt
11601 Bluegrass Parkway
Louisville, KY 40299
502.633.4450 or 866.633.4450
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