Non-monetary loan covenants are items you must manage throughout all or part of the loan. If you don’t, you will trigger the loan coming due or other unfavorable outcome. (Remember what happened in that one Indiana Jones movie? Yeah, like that.)
These covenants are often unique to the lender and loan program. Like bad-boy clauses (and indeed, all your contract terms), you should evaluate them closely and ensure the language is specific. You should also try to negotiate them to more favorable terms where possible.
The following non-monetary loan covenants are common. Each covenant usually has language that allows you to deviate from them with the lender’s written permission. If you come across a covenant not on this list, that’s not unusual. The options can be almost endless, covering every minutia of circumstance. Also, you may find the oddball covenant if a lender had something happen and went, “Well I don’t want to see that ever again!”
Common non-monetary loan covenants
- Capital expense limitations. You will not spend more than a specified amount on capital expense without approval. However, this may go away after you pay down the loan to a certain amount.
- Corporate existence and qualifications. If borrowing under your business’s name, you must maintain its legal existence and qualifications.
- Change in ownership. You cannot change who owns the business names in the loan contract.
- Debt service coverage ratios. Your business and/or the subject property must generate a certain ratio of cashflow to meet its debts.
- Limitations on sales of assets. You cannot jeopardize your business’s earning power by transferring or selling off earning assets. However, this is usually allowed if you then use the proceeds to pay the lender back in full.
- Limitations on up-streaming funds. You cannot unduly drain your business’s cashflow. This may include you paying dividends, owner’s draws, shareholder advances, and making loans to affiliates.
- Limiting or prohibiting mergers, acquisitions, and consolidations. You will not make material changes to the business or its structure.
- Insurance. You must maintain appropriate insurance to cover the collateral.
- Property value. The subject property or other loan collateral cannot fall below a certain value. However, this may go away after you pay the loan down to a certain amount.
- Reimbursement covenant. You must reimburse the lender the money they spent in taxes, insurance, attorney or inspection fees that the lender incurs after the loan closes in order to protect their collateral position.
- Restrictions on substantial changes in your business. You cannot change what it is your business does.
- Taxes and fees. You will pay all taxes and fees associated with the collateral/asset.