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Loan Covenant

A Loan Covenant is a condition set by a lender that a borrower must meet to maintain a loan facility. Covenants ensure the borrower stays financially healthy and may include financial ratios, reporting requirements, or restrictions on additional borrowing. Loan Covenants apply to Secured Loans, Unsecured Loans, and other facilities such as Working Capital Loans.

Why Loan Covenants Matter

Covenants protect lenders by ensuring borrowers maintain financial stability and comply with agreed terms. For SMEs in the Tradie Hub, Truckie Hub, Café Hub, and Whitecoat Hub, understanding covenants prevents breaches and avoids default.

  • Ensures business stays within agreed financial limits
  • Prevents misuse of funds or over-leveraging
  • Helps plan cashflow and financial decisions
  • Maintains lender confidence and facility availability

How Loan Covenants Work

  • Specified in the loan agreement by the lender.
  • Can be financial (e.g., debt-to-equity ratio, interest coverage) or operational (e.g., reporting, restrictions on new debt).
  • Borrower must comply to avoid penalties, higher interest, or default.
  • Monitoring is usually periodic via financial statements or covenant reporting.

Loan Covenants are linked to other financial terms including Borrowing Capacity, Credit Limit, and Facility.

Related Switchboard Resources

Official info: business.gov.au

What happens if a covenant is breached?
The lender may charge penalties, increase interest rates, or demand immediate repayment, depending on the severity of the breach.
Are all covenants financial?
No — some are operational, requiring reporting or limiting additional borrowing.
How often are covenants monitored?
Typically quarterly or annually via financial statements and lender reporting requirements.