Loan Covenant guarantees your credit worth so know them better
Posted on: May 13, 2011
Applying for a business loan requires a right amount of knowledge on some terminologies .Well versed with these helps in understanding your terms and loan terms .one very specific term when applying for loan is a loan covenant. It is a condition that a borrower must comply with in order to adhere to the terms of the loan. If a borrower does not meet the covenants, the loan can be considered in default and the lender is given the right to demand payment in full.
Common covenants include proof of hazard/content insurance, proof of life insurance for the owner or manager without whom the company could not continue. Current taxes/fees/licenses, submission of updated financial statements of the business also acts as covenants.
This is very important because lenders typically require covenants in a business loan to maintain loan qualify, keep sufficient cash flow, preserve the equity in a loan, to maintain capital structure in situations where this is a weakness, and to keep an updated portrait of a borrower’s financial performance and conditions.
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