Springing covenant

Definition

A condition that sits dormant until a trigger wakes it up.

Why It Matters

It is the compromise a borrower and a lender reach when neither wants a test running from day one. Nothing is measured while the business performs; cross a line, usually a liquidity floor or an availability threshold, and the full test starts applying with the reporting to match. The danger is built into the design: it arrives at the worst possible moment, because the trigger is a bad month. Ask what wakes it, how long it stays awake, and what puts it back to sleep.

In numbers: A covenant springing when cash falls under $250,000 can start testing coverage in the same quarter revenue dropped 10%.