Covenants: the fine print that outlives the approval
The approval happens once. The covenants — the promises buried in the middle pages of your loan documents — get tested every year the loan is alive, usually at exactly the moment your accountant delivers the year-end statements. When I reviewed annual files, covenant results were the first page I turned to. Most owners couldn't have named theirs.
What a covenant actually is
A covenant is a condition you agree to keep meeting for the life of the loan. Not a payment — you can be perfectly current on payments and still be offside a covenant. Think of the loan as approved against a picture of your business: a certain level of cash flow, a certain amount of owner money in, a certain set of assets. Covenants are the lender's way of saying "keep the business looking roughly like that picture."
Financial covenants: the ones with numbers
The most common is a minimum debt-service coverage ratio — cash flow over loan payments, often set near the familiar 1.25× line. You may also see a leverage limit (debt relative to equity) or a working capital minimum. Each one is measured from your year-end statements, which is why the statements matter as much as the ratio: a legitimate expense decision, like a large owner bonus, can push a healthy business offside on paper. Know your ratios before the statements are finalized, not after.
Positive covenants: the things you must do
Deliver financial statements within a set number of days after year-end. Keep insurance in force with the lender named. Keep taxes current. These sound trivial and they are the ones most commonly missed — not from trouble, just from nobody owning the calendar. A file that's late on statements two years running gets a reputation inside the bank, and reputations inside a bank are hard to see and harder to fix.
Negative covenants: the things you can't do without asking
Take on new debt. Sell major assets. Pay dividends or repay shareholder loans beyond a set level. Change ownership. None of these are forbidden — they require consent, which is usually given when the request makes sense. The trap is doing them first and mentioning them at year-end. The same equipment lease that would've drawn a same-week "no problem" in March becomes, discovered in the statements in February, a breach and a trust problem.
Covenants aren't the bank preparing to pounce — they're a tripwire the lender strings up so a small problem has to announce itself while it's still small.
What a breach actually triggers
Not, in the ordinary course, a demand for repayment. What actually happens: a conversation, a request for your plan to get back onside, and typically a waiver — sometimes with a fee, sometimes with tightened terms. What determines which way it goes is largely whether you raised it first. An owner who calls in month ten and says "we'll be offside at year-end, here's why and here's the fix" is a strong operator having a bad year. An owner whose breach is discovered is a question mark.
Running the business with covenants in view
Put your covenants on one page. Calculate them quarterly from your own internal numbers — the arithmetic takes minutes once it's set up. Before any big move (new debt, big dividend, asset sale), check the page. That habit costs you an hour a quarter and buys you the one thing that genuinely changes how a lender treats a wobble: no surprises. Your accountant can build the covenant page in an hour — ask for it the day you sign.
Build a plan that can keep its promises
LenderReady builds your plan through a conversation — with projections that show your debt-service coverage year by year, so you can see whether the covenants you'll be asked to sign are ones your own numbers can meet.
Build my planLenderReady is an educational service, not a lender, broker, or financial advisor. Lending criteria vary by institution and change over time; treat this as a starting point, not a guarantee.