Your business may require a loan for various reasons. As such, you must be aware of covenants and the consequences of breaching them. Taking out a loan may be part of a strategic commercial decision, not only due to financial struggles. For example, your business may invest in modern machinery with a high one-off cost to avoid falling behind competitors. You may forecast that investing in new equipment now may result in higher profit margins in 12 months. However, to obtain a business loan, you must agree to some strict wording, some of which are called \u2018covenants\u2019. This article will explain what a covenant in a loan agreement is, why it exists and how breaching it can impact your business.<\/p>\n\n\n\n
In brief, a covenant is a contractual promise in which your business agrees to perform a particular action<\/a> or, alternatively, agrees not to carry out a specific activity. A covenant differs from other clauses in a loan agreement<\/a> in that a breach of a covenant will result in more severe consequences.<\/p>\n\n\n\n The priority of a lender is to try and ensure it can recover all money lent to your business. As such, a lender will use loan covenants to try and limit your business to activities that are not adverse to making a profit (and repaying the loan). This will include restrictions on offloading company property or agreeing to further loans.<\/p>\n\n\n\n\n\n Continue reading this article below the form\n <\/i>\n<\/a>\nWhy Do Lenders Use Covenants?<\/h2>\n\n\n\n