Loan covenants ensure that a borrower’s financial performance supports the profitability and cash flow needed to repay the loan. They serve as risk management safeguards for the lender, but they also promote a borrowing company’s overall financial health.

For instance, some covenants require businesses to take specific steps, like maintaining a certain debt-service coverage ratio (DSCR), providing audited financial statements, and keeping accurate accounting. Others may outline expectations for specific actions, such as limiting the issuing of dividends to shareholders or restricting the amount of debt a company can carry.

Some businesses may find covenants too restrictive; they could feel that maintaining loan covenant compliance hinders their fiscal freedom. But operating under covenants can reduce the cost of the loan. That’s because in exchange for agreeing to operate under the lender’s repayment conditions, the lender may offer favorable borrowing terms in return.

However, company growth and evolving market conditions can create shifts in your financing goals that necessitate adjustments. Our Business Lifecycle Advisory (BLA) approach helps assess how a loan you have now or are considering taking on aligns with economic conditions and your business stage. Events like expansion or transition are pivotal moments that require adaptive financing structures in order to happen smoothly. Truist’s relationship managers take the lead in helping craft a process-minded framework for clients that can generate covenant structures that support both near-term flexibility and long-term stability.

Quantitative covenants set standards for financial measures—such as your cash flow, your debt level, and the strength of your business—that give your lender confidence in your company’s ability to repay a loan. Typical measures include debt-to-equity, cash-to-assets, and interest coverage ratios.

Qualitative covenants specify information that your company must provide, like quarterly financial statements or tax reports. These covenants also detail actions (like taking on more debt or selling assets) your business can’t take without your lender’s consent.

Standard loan covenants outline criteria that are part and parcel of lending but still must be stipulated in the credit agreement to be legally enforceable. An example would be requiring the borrower to pay the principal and interest on specific due dates.

Nonstandard loan covenants are typical in commercial lending, and they address characteristics related to the borrower. They include requiring the borrower to supply accounts receivable lists or monthly compliance certificates.

Financial loan covenants ensure that a borrower maintains adequate financial health to repay the loan. They may restrict financial decisions, like debt-to-equity ratios or maximum capital expenditure requirements.

Nonfinancial loan covenants protect a lender’s interest beyond financial health. They may restrict a company’s ability to transact a mergers and acquisitions (M&A) deal or to change business leadership.