Covenant

A covenant is a condition or promise attached to a loan agreement that the borrower must maintain throughout the term. Covenants are categorised as positive (things you must do, such as provide regular financial information) or negative (things you must not do, such as take on additional secured debt without consent).

Financial covenants set specific metric thresholds that must be maintained - common examples include a minimum DSCR (debt service coverage ratio), a maximum leverage ratio (net debt to EBITDA), or a minimum net asset value. If a covenant is breached, the lender typically has the right to review or accelerate the loan.

Covenants are more common in larger, more structured lending (commercial mortgages, development finance, leveraged facilities) than in smaller SME products. For most small business loans below £250,000, covenants are less common. Understanding and planning around financial covenants is important for businesses taking larger or longer-term secured facilities.

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