Covenants
Principles of Finance glossary · Principles Of Finance
Definition
Contractual provisions in a debt agreement that restrict the borrower's actions.
Covenants in plain English
When a company borrows money, the lender usually writes rules into the loan contract to protect itself — these rules are called covenants. They restrict what the borrower is allowed to do, like "you can't pile on a huge new loan" or "you must keep enough cash on hand." It's like a parent co-signing your phone plan on the condition that you don't rack up giant bills — the strings attached lower the lender's risk of not getting paid back. Break a covenant, and the lender can often demand its money back early or charge penalties.
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