Covenant

Affirmative covenants require action: deliver financial statements by a stated date, maintain insurance with the lender named, pay taxes, keep the collateral in repair, maintain the primary operating account with the lender. Negative covenants prohibit action: no additional debt, no additional liens, no sale of assets outside the ordinary course, no change of control, limits on owner distributions and compensation. Financial covenants set numbers to hit: a minimum debt service coverage ratio, a minimum current ratio or tangible net worth, a maximum leverage ratio.

Testing is periodic, usually quarterly or annually, and often requires a signed compliance certificate showing the calculation. The definitions in the credit agreement, not standard accounting, control how each ratio is computed, and negotiating those definitions matters more than negotiating the threshold.

Breach without missed payment is called a technical default. What follows is usually not immediate enforcement: the lender may waive for a period, charge a waiver fee, reprice, tighten the covenant, or demand additional collateral. But the right to accelerate exists once the breach does, and it converts the relationship.

Cash advance agreements have covenants too, without the vocabulary: no additional financing, maintain the bank account being debited, do not change processors, notify on material change. They are enforced more abruptly and with less appetite for waivers.