Loan Covenant

This article talks about Loan Covenant, which is usually restrictive or negative covenant in a loan agreement that limits the borrower’s or a firm’s management’s freedom to incur more debt, increase the salaries of executives, pay bonuses, etc. Covenants exist to reduce the risk to all parties to a loan. It may also be waived, either temporarily or permanently, usually at the sole discretion of the lender. It can be financial, information, ownership, affirmative, negative or positive covenants. Often, the breach of any covenant gives the lender the right to call the loan or collect interest at a higher rate.