Financial Covenants
The periodic financial tests a borrower must keep meeting, set as an early warning trip-wire for the lender.
- What financial tests apply and how often
- How much cushion exists versus the business plan
- Whether accounting changes could cause a breach
- How the defined financial terms are calculated
If this clause already feels aggressive in isolation, upload the full contract and see how it combines with payment terms, liabilities, and exit rights.
Analyze My ContractWhat this clause actually does
Financial covenants require a party to meet certain financial benchmarks on a recurring basis, such as leverage or coverage ratios. The levels are set to create an early warning signal if the party starts having financial difficulty, so a lender can act before a default becomes a loss.
Why people get burned by this clause
Financial covenants set with no cushion against the borrower's own forecast can trip on an ordinary bad quarter, handing the lender default leverage when the business is basically fine.
What should make you slow down
- Covenant levels set with no headroom against projections
- Tests that an ordinary downturn would breach
- No frozen-GAAP protection, so accounting-standard changes can cause a breach
- Definitions of the financial terms that differ from how the company actually reports
Where you usually see it
- Bank credit agreements
- Some private debt and lease agreements
- Agreements where credit risk must be monitored over time
What the platform checks in the live contract
- What financial tests apply and how often
- How much cushion exists versus the business plan
- Whether accounting changes could cause a breach
- How the defined financial terms are calculated
What to test against your deal
- Levels are set with real headroom against projections
- Frozen GAAP protects against later accounting-standard changes
- Defined terms track how the company actually reports
- An equity cure or grace mechanism softens a single miss
Definitions worth opening next
Clause pages that share the risk pattern
Articles that go deeper
Financial covenants are recurring tests that act as an early warning for lenders. Set without cushion against the company's own forecast, they can trip on a normal bad quarter. Check the headroom, the definitions, and whether accounting changes alone could cause a breach.
See how this clause behaves in the real contract.
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