Business, Legal & Accounting Glossary
A Loan Covenant is an agreement made by the company with a lender of long-term finance, protecting the loan by imposing conditions on the company, usually to restrict further borrowing.
A loan covenant is a condition in a commercial loan or bond issue that requires the borrower to fulfil certain conditions or which forbids the borrower from undertaking certain actions, or which possibly restricts certain activities to circumstances when other conditions are met.
A loan covenant is essentially a pledge that spells out the terms and conditions of a loan between a borrower and a lender. The borrower will commit to remain financially healthy for the length of the loan as part of the loan covenant. The lender will also explain the lender’s expectations for the borrower’s capital structure and debt in terms of loan repayments. As a result, bank loan covenants will prohibit borrowers from taking particular acts or may force them to meet certain requirements. Finally, bank loan covenants protect the borrower’s earning assets by assuring that they can always generate the revenue required to make loan repayments.
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This glossary post was last updated: 25th January, 2022 | 0 Views.