Loan covenants

Definition

Promises in the loan agreement that keep binding you after closing.

Why It Matters

Your operating freedom after close is written here: distribution limits, minimum coverage ratios, and the reporting a lender can demand. Read them before signing rather than during the first tough quarter, because tripping a covenant can hand the lender power over a business that is still paying on time.

In numbers: A covenant to keep DSCR above 1.25x tested each quarter means a soft quarter that dips to 1.1x can technically default the loan even while payments are current; knowing the ratio and the test date is how you manage to it.