What covenants might a business loan come with?

What covenants are

Covenants are promises built into the loan agreement that you must keep for its life, over and above making repayments. They come in the facility letter and are the lender's way of monitoring risk after drawdown — distinct from conditions precedent, which must be met only before drawdown.

Common types

• Financial covenants — maintaining a ratio such as DSCR or gearing within limits.
• Reporting covenants — supplying management accounts or updates on a schedule.
• Restrictive covenants — not taking on further borrowing, granting new security, or paying large dividends without consent.

Smaller unsecured facilities may carry few or none; larger and secured deals carry more.

Why a breach matters

Breaching a covenant can, in principle, let the lender demand repayment or renegotiate — even if you have never missed a payment. So read them before you sign, make sure you can realistically keep to them, and tell the lender early if you are heading for a breach rather than waiting for them to notice. Keep your headroom above any financial covenant, and see the avoiding-default guide.