Debt covenants
A covenant is a promise that lasts as long as the loan. Here is how the common ones are measured, how a breach happens without a missed payment, and what that means for a new request.
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Updated October 13, 2026 · Merchant Fund Express
A debt covenant is a condition in a loan agreement that the borrower must keep for the life of the loan. Some are financial, such as keeping a minimum debt service coverage ratio. Some are behavioral, such as not taking on new debt or selling major assets without the lender's consent. Breaking one is a default even if every payment has been made on time, which is why covenants matter as much as the rate.
| Covenant | What it usually requires |
|---|---|
| Debt service coverage ratio (DSCR) | Cash flow available for debt divided by debt payments must stay above a floor, often around 1.25 |
| Maximum leverage | Total debt to earnings or to equity must stay under a cap |
| Minimum liquidity | Keep a stated cash balance or working capital level |
| Negative pledge | No new liens on assets already pledged |
| No additional debt | No new borrowing above a set amount without consent |
| Reporting | Send financial statements or tax returns by set dates |
| Change of control | No sale or major ownership change without consent |
Bank and SBA-style term loans carry the most covenants. Revenue-based products and merchant cash advances usually carry fewer financial covenants, but their agreements often restrict changing bank accounts, switching card processors or stacking another advance.
Suppose a bank loan requires a DSCR of at least 1.25, tested every year on your tax return. Your business earns $180,000 of cash flow available for debt service, and your existing annual debt payments are $120,000.
| Line | Figure |
|---|---|
| Cash flow available for debt service | $180,000 |
| Current annual debt payments | $120,000 |
| DSCR today ($180,000 / $120,000) | 1.50, passes |
| New funding adds annual payments of | $30,000 |
| DSCR after ($180,000 / $150,000) | 1.20, below the 1.25 floor |
Nothing was missed, nothing was late, and the business is healthier than it was a year ago. The new payment alone pushes the ratio under the covenant. That is the kind of breach owners discover after the fact. Run the test before you sign anything new.
All figures in worked examples are illustrations of the arithmetic, not offers or quotes. Real terms depend on your file and the funder.
Talking to the lender before the test date is almost always better than after it. Waivers are routine when the business is sound; surprises are not.
We read your bank statements, not your covenants, so a covenant will not stop a review. It can stop you from accepting the offer. Before you request new money, pull your existing loan agreement and look for a no-additional-debt clause, a negative pledge and any DSCR or leverage test. If one applies, the new payment has to fit inside it or you need the lender's consent first.
Tell us about any covenant on your application. A smaller request, a revenue-based product without a fixed payment, or timing the funding after your next covenant test can each keep you inside the rules. See how existing positions are counted and the debt service coverage entry for the ratio itself.
If a new payment would breach a covenant and your lender will not consent, the cheapest path is often to wait until the covenant loan is paid down or the next test passes comfortably. Funding that triggers a default on a cheaper loan is rarely worth it. When the numbers do fit, the qualification check takes a minute and does not affect your credit, and you can apply here.
Yes. Covenants are separate promises. Falling below a required ratio or taking on prohibited debt is a breach even when every payment is current.
Usually not financial ratio tests, but agreements commonly restrict changing bank accounts or processors and taking another advance without consent.
Many bank term loans test around 1.20 to 1.25, but the exact floor is set in each agreement. Check yours.
No. It can affect which offer you can accept, so share any covenant on your application and we will factor it in.
Same-day decision. Applying takes a few minutes and will not affect your credit score.
