<\/span>What are the three main types of loan covenants? <\/span><\/h3>\n\n\n\nThe three main types are affirmative covenants (requiring specific actions), negative covenants (restricting certain actions), and financial covenants (requiring maintenance of specific financial ratios). <\/p>\n\n\n\n
<\/span>What is the difference between affirmative and negative covenants? <\/span><\/h3>\n\n\n\nAn affirmative covenant obligates the borrower to do something, like submitting financial statements, while a negative covenant restricts the borrower from doing something, like taking on new debt without consent. <\/p>\n\n\n\n
<\/span>What is a financial covenant example? <\/span><\/h3>\n\n\n\nA common financial covenant example is a requirement to maintain a debt-to-EBITDA ratio below a specified threshold, or a minimum interest coverage ratio, tested at regular intervals. <\/p>\n\n\n\n
<\/span>What happens if a loan covenant is breached? <\/span><\/h3>\n\n\n\nThe lender typically issues a formal notice, may grant a cure period, and can escalate to penalty interest, accelerated repayment, or legal action if the breach isn’t resolved. <\/p>\n\n\n\n
<\/span>Why do lenders use covenants? <\/span><\/h3>\n\n\n\nLenders use covenants to align incentives, monitor borrower risk continuously, and get an early-warning signal before a loan slide toward default. <\/p>\n\n\n\n