Key Insight
A covenant is a promise you make to the lender at closing that you have to keep for the life of the loan. Breaching a covenant doesn't automatically mean default — but it gives the lender leverage, which is never a comfortable position for a borrower.
Types of Loan Covenants
Affirmative covenants — things you must do:
- Maintain required insurance coverage
- Provide annual financial statements to the lender
- Notify the lender of material adverse changes
- Maintain the business in good standing
Negative covenants — things you cannot do without lender approval:
- Take on additional debt above a threshold
- Make distributions to equity holders above a specified amount
- Sell significant assets
- Acquire other businesses
Financial covenants — metrics you must maintain:
- Minimum DSCR (often 1.25x)
- Maximum leverage ratio (total debt / EBITDA)
- Minimum liquidity (current ratio or cash balance)
SBA Loans and Covenants
SBA 7(a) loans don't have standardized covenants — individual lenders impose their own. Common requirements include:
- Annual reviewed or compiled financial statements
- Notification of owner change
- Prior lender approval for additional borrowing
Covenant Breach
When a borrower violates a covenant, the lender typically has the right to:
- Declare a default (accelerate the loan balance due)
- Impose a penalty rate
- Renegotiate terms
In practice, lenders often grant a waiver — especially for a first breach by an otherwise performing borrower. But a waiver usually comes with conditions attached.
Free Prescore — No Credit Card Required
Apply this to a real deal in minutes. No account, no commitment.