Understanding Commercial Loan Covenants - Breaking Down 6 of the Most Common Used Loan Guardrails!

Loan Covenants are often overlooked by business owners until it is too late! In this video your hosts, Adam “The Boz” Bosnjak and Besim Tafilaj, will explain what exactly a commercial loan covenant is. Loan covenants are restrictions that lenders (creditors, debt holders, investors) put on lending agreements to limit the actions of the borrower (debtor). In other words, debt covenants are agreements between a company and its lenders that the company will operate within certain rules set by the lenders. - Corporate Finance Institute Positive debt covenants are covenants that state what the borrower must do. For example: Achieve a certain threshold in certain financial ratios Perform regular maintenance of capital assets Provide yearly audited financial statements Corporate Finance Institute Negative debt covenants are covenants that state what the borrower cannot do. For example: Pay cash dividends over a certain amount or predetermined threshold Sell certain assets or Borrow more debt Issue debt more senior than the current debt Partake in certain M&A - Corporate Finance Institute The guys cover six commonly used loan covenants, they explain how to calculate them and what they are meant to test. The will cover: Debt Service Coverage Ratio Minimum Tangible Net Worth Fixed Charge Coverage Ratio Funded Debt to EBITDA Liquidity Maintenance Asset Coverage Ratio