Business Line of Credit Covenants and Restrictions 2026

Q: What are the most common LOC covenants?

Most common: minimum DSCR (typically 1.15–1.25×), minimum current ratio, maximum debt-to-equity ratio, and restrictions on additional debt. Bank LOCs have more covenants than online lender products.

Q: What happens if I violate a LOC covenant?

Covenant violation triggers a 'technical default.' The lender may: freeze the line, reduce the credit limit, increase your interest rate, call the full balance due, or initiate collection. Most lenders prefer to negotiate a waiver rather than call the loan.

Q: Can I negotiate LOC covenants?

Yes — especially for bank LOCs. Common negotiations include looser DSCR thresholds, longer cure periods, carve-outs for one-time events, and waiver mechanisms for predictable violations like acquisitions.

Q: Do online lenders have covenants?

Online lenders typically have fewer formal covenants. Instead, they monitor bank account cash flow in real-time. Declining revenue, low balances, or late payments will trigger automatic line reductions — a de facto covenant enforcement.

LOC Covenant Compliance Checklist

Review and track the most common LOC covenants. Check each one you've confirmed in your credit agreement.

0 of 0 covenants reviewed

Minimum DSCR requirementTypically 1.15–1.25× — net operating income ÷ total debt service
Affirmative
Minimum current ratioUsually ≥1.0–1.25× — current assets ÷ current liabilities
Affirmative
Minimum liquidity / cash reserveSome lenders require maintaining minimum cash balance (e.g., $50K)
Affirmative
Annual financial statement submissionProvide audited or reviewed financials within 120 days of fiscal year end
Reporting
Quarterly financial reportingInterim P&L and balance sheet within 45–60 days of quarter end
Reporting
No additional debt restrictionProhibits taking on other debt above a threshold without lender consent
Negative
Maximum debt-to-equity ratioTotal liabilities ÷ equity must stay below a set level (e.g., 3:1)
Negative
No asset sale restrictionProhibits selling key business assets without lender approval
Negative
Change of ownership / control restrictionMaterial ownership changes require lender notification or approval
Negative
Primary depository relationshipSome banks require you maintain your primary business account with them
Affirmative
Insurance maintenance requirementMaintain adequate business insurance at all times during the loan term
Affirmative
Prompt default notificationMust notify lender within X days of any event that could trigger default
Reporting

Types of LOC Covenants

Covenant Type	What It Requires	Violation Severity	Most Common In
Minimum DSCR	Net operating income ≥ 1.15–1.25× debt payments	High	Bank LOCs, SBA lines
Minimum Current Ratio	Current assets ≥ 1.0–1.25× current liabilities	High	Bank LOCs
No Additional Debt	No new borrowing above threshold without consent	High	Bank LOCs, larger online lenders
Annual Financials Submission	Submit audited/reviewed statements annually	Medium	Banks, credit unions
No Asset Sale	Can't sell key assets without approval	Medium	Secured LOCs
Primary Depository	Maintain main account at the lending bank	Lower	Community banks
Insurance Maintenance	Keep business insurance current	Lower	Most LOCs

What Happens When You Violate a Covenant

How to Negotiate Covenants Before You Sign

Request looser DSCR thresholds — Standard is 1.25×; try negotiating to 1.10× with a 30-day cure period before a default is declared
Add a cure period to all covenants — Standard cure periods are 30 days; push for 60–90 for financial ratio covenants
Carve out one-time events — Acquisitions, extraordinary expenses, or one-time losses shouldn't trigger ratio covenants; negotiate specific carve-outs
Negotiate automatic waiver for minor violations — Request that first-time, minor violations trigger a notice process rather than immediate default
Review the "additional debt" restriction carefully — This may conflict with equipment financing, other credit lines, or even credit cards; understand the threshold

Frequently Asked Questions

What are covenants in a business line of credit? ▼

Covenants are contractual conditions in your LOC agreement that require you to maintain certain financial benchmarks (affirmative covenants) or prohibit certain actions (negative covenants). Violations can trigger technical default, rate increases, or line reduction.

What are the most common LOC covenants? ▼

Most common: minimum DSCR (1.15–1.25×), minimum current ratio, maximum debt-to-equity, no additional debt restriction, and annual financial statement submission requirements. Bank LOCs have significantly more covenants than online lender products. See our DSCR explainer.

What happens if I violate a LOC covenant? ▼

Covenant violation triggers a "technical default." The lender may freeze the line, reduce the credit limit, increase your interest rate, or call the full balance due. Most lenders prefer to negotiate a waiver — contact your lender proactively before a violation occurs.

Can I negotiate LOC covenants? ▼

Yes — especially for bank LOCs where relationships matter. Common negotiations: looser DSCR thresholds, longer cure periods, carve-outs for one-time events, and pre-agreed waiver mechanisms for planned activities like acquisitions.

Do online lenders have covenants? ▼

Online lenders typically have fewer formal covenants but monitor bank account cash flow in real-time via account access. Declining revenue or low balances will trigger automatic line reductions — a de facto covenant enforcement without the formal documentation.