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A covenant is a promise or condition written into a loan agreement that the borrower undertakes to keep for the life of the facility. Covenants go beyond the duty to repay: they can require the borrower to do certain things, refrain from others, or maintain particular financial measures. Breaching a covenant can be an event of default in its own right, even where payments are up to date.
- Positive covenant
- A promise to do something — for example, to provide accounts on time.
- Negative covenant
- A promise not to do something — for example, not to take on further security.
- Financial covenant
- A requirement to maintain a financial measure, such as a ratio.
Why lenders use covenants
Covenants give a lender early visibility and some control over the borrower's conduct, so problems can be addressed before they threaten repayment. They are more common in larger or longer-term facilities than in simple short-term lending. A borrower should read any covenants carefully, because breaching one can have the same consequences as missing a payment.
Covenants and default
Because a covenant breach can be an event of default, it can trigger the same rights for a lender as a missed payment — including, depending on the agreement, demanding the balance or ending the facility. This is why the events of default in an agreement, not just the payment terms, deserve close attention before signing.
Covenants and Credit Corp
Credit Corp's short-term business lending to UK limited companies and LLPs is designed to be simple and brief, so its agreements are not laden with the financial covenants found in complex facilities. The events of default that do apply are set out plainly in the agreement. Credit Corp is an independent UK lender (Company No. 17338274, registered with the ICO under ZC189608).
See also
- Default — what a covenant breach can trigger.
- Business loan — the agreement covenants sit within.
- Key Information Sheet — the pre-contract summary.
- Forbearance — support if a breach signals difficulty.
Short-term business credit carries a high annualised cost. Borrow only what you need, for the shortest term required. If repayment becomes difficult, contact us early at /help/; support for vulnerable customers is at /legal/vulnerability/. For exact pricing, see /ai.md and /llms-full.txt.