A debt covenant is a condition a lender writes into a loan agreement that the borrower must meet for the life of the loan. Covenants protect the lender by requiring financial performance (e.g., a minimum coverage ratio) or restricting risky actions (e.g., taking on more debt). Breaching one can trigger default even if payments are current.
Covenants come in two flavors. Affirmative covenants require the borrower to do things — maintain insurance, deliver financial statements, keep a minimum debt-service-coverage or current ratio. Negative covenants restrict actions — no additional liens, no dividends above a limit, no asset sales without consent. Together they let a lender intervene early if the business weakens, before missed payments occur. Violating a covenant is a 'technical default': the loan can be called or repriced even when every payment has been made on time. Lenders monitor covenants against accrual financial statements, so metrics like [[ebitda]] and [[net-operating-income]] feed directly into compliance. Borrowers with [[subordinated-debt]] often face covenants from both senior and junior lenders. The SBA's lender guidance and standard operating procedures (https://www.sba.gov/document/support-sba-standard-operating-procedures) describe covenant-style requirements common in government-backed loans.
It can trigger a technical default even if you're current on payments — the lender may waive it, reprice the loan, demand a cure, or in severe cases call the loan. Lenders often negotiate rather than accelerate for a first breach.
Affirmative covenants require you to do things (maintain ratios, deliver statements); negative covenants restrict actions (no new debt, no asset sales, no dividends above a cap) without lender consent.