Financing · Topic guide
Covenants
Contractual promises and tests that constrain a borrower’s finances or actions.
Covenants give a lender ways to monitor and limit risk during the life of a loan. They may test financial performance or restrict actions such as acquisitions, distributions and ownership changes. A business can therefore face a contractual problem even while making scheduled payments. Understanding the restrictions is part of evaluating the acquisition strategy, not a task to leave until after signing.
The collection describes an HVAC loan that restricted buying another HVAC business outside the lender’s security group. A subsequent acquisition prompted a repayment demand. This is a personal-experience account, but its mechanism is clear: a future strategic action conflicted with a term accepted to complete the earlier deal. Watch source
Turn the agreement into a calendar of tests, information deliveries and consent requirements. Identify definitions, reporting periods and where headroom could narrow. In one hypothetical, £1m monthly revenue with a permitted 20% shortfall gives an £800k floor; that is a revenue test, not a debt-service ratio. Cash tests also need precise timing because payroll and collections change balances within a day. The collection introduces these issues but does not publish a complete signed covenant schedule or prove any covenant-light facility was obtained. Flexibility must be established from terms, not assumed from a lender’s reassuring description. Watch source Watch source
Follow the connections
Senior debt · Debt service · Roll-ups.
Continue in the course: Debt terms and covenants.
See it in an example
- Hypothetical
The £800k monthly revenue covenant illustration
Calculate a hypothetical monthly revenue floor and distinguish covenant headroom from available cash.
Numbers in context
- Required recurring maintenance mix · 30–40–50% of combined revenueProposed
A prospective investor asks for a meaningful maintenance-revenue component in the HVAC group.
Several percentages are discussed; no signed covenant or single firm threshold is shown.
- Change of control · 51% sale exampleHypothetical
A majority-share sale illustrates how a change-of-control restriction might be triggered.
The example does not establish any actual facility's control definition.
- Value extraction · $1m salary exampleHypothetical
An excessive salary example explains why lenders may restrict cash extraction.
The amount is illustrative; no executed payment limit is supplied.
- Lender monitoring · MonthlyReported actual
An unnamed bank is described as checking business figures every month.
The account does not disclose the reporting covenant or identify the facility. Includes audio recovered with Whisper; amounts and wording have not been independently verified.
- Revenue covenant example · £12m annual / £1m monthly; 20% deviation; £800k floorHypothetical
A revenue covenant example turns annual sales into a monthly floor after a permitted decline.
This is neither a debt-service nor leverage covenant and is not taken from an executed facility. Includes audio recovered with Whisper; amounts and wording have not been independently verified.
Sources & further viewing 4 videos
The explanations on this site are independent synthesis. Follow each original for full context. A reported experience is not independent proof of a transaction.
- Personal experience Covenant breach despite performing asset
- Educational Financial covenants, change of control, distributions
- Educational Cash-test measurement timing