A requirement in a financing agreement, such as maintaining certain financial ratios.
For example, a lender includes a financial covenant in a $400,000 business loan requiring the company to maintain a minimum current ratio of 1.25 and a maximum debt-to-equity ratio of 2.0, measured quarterly. If either threshold is breached, the lender can demand early repayment.
Why it matters: Breaching a covenant can trigger a technical default, allowing the lender to demand immediate repayment or seize collateral.
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