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A loan covenant (a promise) is an agreement stipulating the terms and conditions of loan policies between a borrower and a lender. Banks include covenants in loan agreements to preserve their position and improve the likelihood a loan will be paid by the borrower in full accordance with the loan’s terms and conditions.
Loan covenants are designed to protect the earning assets of the borrower, ensuring your business can generate the revenue necessary to repay the loan. Covenants are stipulations that you, as the borrower, agree to.
Covenants make sure that (1) the lenders’ rights are secure, (2) there is a reliable mechanism to rectify the process, and (3) there is a clear illustration of events leading to the borrower’s default.
Table of Contents
Three Major Loan Covenants
Affirmative Loan Covenants “I Will” Affirmative loan covenants remind the borrowers that they should perform expressed activities to maintain a healthy operation of their businesses, which will in return create a stable financial performance.
Examples of Affirmative Loan Covenants:
- Required to pay all business and employment related taxes.
- Required to maintain current financial records and deliver to bank at regular intervals.
- Required to maintain insurance policies for business and possibly include lender as “additional insured”.
- Required to for the business to maintain a good standing in the state where it is formed.
Negative Loan Covenants “I Will Not” Sometimes, the lenders may want to create a boundary around major financial and ownership decisions made by the borrower. Banks include negative loan covenants that require the business owner to seek the bank’s permission to take certain actions.
Examples of Negative Loan Covenants:
- Limiting the total indebtedness for the business and/or shareholders.
- Restricting or forbidding restrictions paid to shareholders.
- Preventing a merger or acquisition without the Bank’s permission.
- Preventing the sale of assets without the Bank’s permission.
- Maintaining a specific Debt Service Coverage Ratio.
Financial Loan Covenants provide measures over whether the borrower is reaching or closely attaining the targets of the estimates provided to the lender. Therefore, to be on the safe side, lenders may provide restrictions on the amount of credit the borrower may access at a given period.
Examples of Financial Loan Covenants:
- Current ratio (current assets divided by current liabilities)
- Borrowing Base Calculation – the metric determined by the value of assets you have available to pledge as collateral for a loan
Lending and borrowing are based on trust, but clear, mutual expectations of any relationship are essential. When your business needs to borrow, you need to trust your lender and understand how your lender ensures that you will repay your loan.
Communication makes covenants work.
Violating a loan covenant may result in the borrower being penalized or the lender calling the borrower’s loan into default.
Keep in close contact with your lender if you think a covenant may be breached. This communication allows for both parties to come together to plan a course of action for the borrower to return to financial soundness.
Contact the Commercial Banking Team at Mars Bank with any questions: 724-625-1555 x250.
Top 9 who is the borrower in a loan edit by Top Q&A
What Is a Co-Borrower? Role in Loan Documents and Vs. Co-Signer
- Author: investopedia.com
- Published Date: 08/11/2022
- Review: 5 (707 vote)
- Summary: A co-borrower is any additional borrower whose name appears on loan documents and whose income and credit history is used to qualify for the loan.
Borrowing Is a Common Way to Buy a House – FHA
- Author: fha.com
- Published Date: 07/29/2022
- Review: 4.68 (417 vote)
- Summary: A mortgage borrower is someone who takes out a home loan to purchase a property. When that person borrows the money, they are making a …
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State Laws Put Installment Loan Borrowers at Risk
- Author: pewtrusts.org
- Published Date: 07/22/2022
- Review: 4.35 (485 vote)
- Summary: When Americans borrow money, most use credit cards, loans from banks or credit unions, or financing from retailers or manufacturers.
- Matching search results: When Americans borrow money, most use credit cards, loans from banks or credit unions, or financing from retailers or manufacturers. Those with low credit scores sometimes borrow from payday or auto title lenders, which have been the subject of …
Borrower Rights and Responsibilities | Enrollment Services
- Author: wright.edu
- Published Date: 09/08/2022
- Review: 4.09 (502 vote)
- Summary: Even if you do not graduate or find a job, student loans still have to be paid back, with interest. There are several repayment options.
- Matching search results: Under certain circumstances, you can receive periods of deferment or forbearance that allow you to temporarily postpone loan repayment or, in the case of forbearance, temporarily reduce your loan payments. These periods do not count toward the …
Co-Borrower Vs Co-Signer – Personal Loan – Bajaj Finserv
- Author: bajajfinserv.in
- Published Date: 03/10/2022
- Review: 3.86 (361 vote)
- Summary: A co-signer is an individual who signs a personal loan application and agrees to take on the repayment liability if the borrower fails to settle the debt on his …
- Matching search results: Under certain circumstances, you can receive periods of deferment or forbearance that allow you to temporarily postpone loan repayment or, in the case of forbearance, temporarily reduce your loan payments. These periods do not count toward the …
Co-borrower vs. cosigner: Whats the difference?
- Author: bankrate.com
- Published Date: 10/05/2022
- Review: 3.6 (550 vote)
- Summary: Co-signers and co-borrowers both assume legal responsibility for a loan, but they do so for different reasons and with different …
- Matching search results: A co-borrower, sometimes called a co-applicant or joint applicant, is a person who shares responsibility for repaying a loan with another person — and who has access to the loan funds. Applying for a loan with a co-borrower reassures the lender that …
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Loan – Definition, Types and Things to Consider Before Applying
- Author: corporatefinanceinstitute.com
- Published Date: 02/21/2022
- Review: 3.47 (591 vote)
- Summary: With unsecured loans, the lenders are very thorough when assessing the borrower’s financial status. This way, they will be able to estimate the …
- Matching search results: A co-borrower, sometimes called a co-applicant or joint applicant, is a person who shares responsibility for repaying a loan with another person — and who has access to the loan funds. Applying for a loan with a co-borrower reassures the lender that …
What is the difference between a borrower, guarantor, reference and witness?
- Author: enrichhk.org
- Published Date: 05/09/2022
- Review: 3.24 (354 vote)
- Summary: This person might also be known as the ‘principal borrower’, meaning the person who has borrowed the ‘principal’ or main loan amount. Guarantor: If you are a …
- Matching search results: A co-borrower, sometimes called a co-applicant or joint applicant, is a person who shares responsibility for repaying a loan with another person — and who has access to the loan funds. Applying for a loan with a co-borrower reassures the lender that …
Guidelines on loan origination and monitoring
- Author: eba.europa.eu
- Published Date: 06/12/2022
- Review: 3.12 (342 vote)
- Summary: They introduce requirements for borrowers’ creditworthiness assessment and bring together the EBA’s prudential and consumer protection objectives.
- Matching search results: The Guidelines will apply from 30 June 2021. However, institutions will benefit from a series of transitional arrangements: (1) the application of the guidelines to the already existing loans and advances that require renegotiation or contractual …
