A Loan Covenants Primer for Lenders

Covenants are loan agreements between a borrower and a bank that communicate the bank’s expectations during their borrowing relationship. Borrowers, for example, are usually required to provide financial statements and tax returns and to maintain certain financial ratios. The breach of a covenant could be a warning sign that a borrower’s performance is below expectations. Covenant violations give the bank the ability to renegotiate loan terms.

Types of Loan Covenants