Financial covenant

Definition

A ratio the borrower must keep hitting for as long as the loan runs.

Why It Matters

Most SBA acquisition loans carry few of these, which is one of the quiet advantages of the program over conventional debt, but a bank pairing a 7(a) with a conventional tranche of its own will usually attach them to the second piece. The two that turn up are a coverage test and a leverage ceiling, measured quarterly or annually off statements you have to deliver on time. Breaching one is a technical default even when every payment has been made, so settle what the cure period is and who does the measuring before you sign anything.

In numbers: A 1.25x coverage covenant on a $1.5M loan can be breached by one bad quarter, with every payment made on time.