Covenant (Loan Covenant)
Conditions in a loan agreement requiring certain actions or restrictions.
Detailed Description
Covenant (Loan Covenant)
What is a loan covenant?
A loan covenant is a condition in a loan agreement that the borrower must follow to protect the lender's interests.
What are the two main types of loan covenants?
The two main types are affirmative covenants, which require specific actions, and negative covenants, which prohibit certain activities.
What happens if a borrower violates a loan covenant?
Violating a loan covenant can lead to penalties like increased interest rates, fees, or even immediate repayment demands.
Why are loan covenants important for lenders?
Loan covenants help lenders mitigate risk by allowing them to monitor the borrower's financial health and operational stability.
Should borrowers negotiate loan covenants?
Yes, borrowers should negotiate loan covenants to ensure terms are feasible and protect their interests.