What is a loan covenant? — Answers

2 min read

A conditionIn the agreement

Financial/otherTwo broad types

Breach = defaultEven if paying

What it means

A covenant is a promise in the loan contract. Financial covenants set thresholds — a minimum debt-service coverage ratio, a maximum gearing level, a minimum net worth. Non-financial (or “information”) covenants require things like filing accounts on time or telling the lender about a major change. Both are ways for the lender to spot trouble early.

What this means for your company

A breach can let the lender demand repayment, add fees or raise the rate — so read the covenants before you sign, not after. If you see a breach coming, tell the lender early; most will waive or reset a technical breach if you are open. Simpler short-term facilities carry lighter covenant packages than large bank term loans, which is worth weighing.

What it means for you

Credicorp lends to your company, not to you personally, and takes no personal guarantee. See business loans or apply online.

Frequently asked questions

Can I breach a covenant while still paying on time?

Yes. Covenants are separate from the payment schedule. You can be fully up to date on instalments yet breach a financial ratio or a filing deadline, which technically puts the loan in default.

What should I do if I am about to breach a covenant?

Contact the lender before the test date. A proactive conversation almost always goes better than a surprise. Lenders can waive, reset or renegotiate, but only if you flag it early.