Loan covenants:

Question

Loan covenants:

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Loan covenants can limit a borrower's discretionary cash outlays to ensure that they can meet their obligations to the lender. This reduces the risk of default and protects the lender's investment. Negative covenants are also common, but loan agreements can include positive covenants that require the borrower to fulfill certain obligations, such as maintaining certain financial ratios or providing regular financial reports. While loan covenants are enforced, violations don't automatically lead to bankruptcy. Instead, the lender may have the right to demand repayment or to take other legal action.

Loan Covenants