Loan Covenant

Loan Covenants are a set of future conditions and rules imposed upon a borrower by a lender. Typically, such covenants will require the borrower to maintain a certain EBITDA, either as an absolute or as a ratio to another number, maintain certain working capital ratios, to reduce the loan balance by any significant sale of fixed assets or investments, and so on.

How onerous the covenants are depend upon the risk of default by the borrower as perceived by the vendor. Failure to maintain the covenants can result in the calling of the loan, but more often will result in penalties and extra fees to the borrowers.