How to Avoid Loan Covenant Breaches in Commercial Financing Agreements
Commercial loans often feel like a lifeline for growing businesses, but they can also be a steady source of stress. You may be juggling payroll, suppliers, seasonal swings, and market pressure, all while trying to keep your lender satisfied.
Loan covenants often go unnoticed until circumstances shift—cash flow tightens, expenses increase, or a reporting deadline is missed. Suddenly, a once-overlooked clause can pose a serious threat to the stability of your business. That anxiety is common, and it’s one of the main reasons businesses seek legal guidance before minor issues turn into serious disputes. If this concern sounds familiar, reaching out for help early can make a meaningful difference.
At The Law Offices of Peter V Lathouris LLC, we assist business owners in Stamford, Connecticut, and throughout Southern Connecticut, in commercial and business law matters. Our firm helps clients identify risks in financing agreements and take steps to reduce the likelihood of covenant breaches before lenders act. If you’re worried about staying in compliance or planning for growth, reach out to us to discuss your situation and options.
Common Types of Loan Covenants That Lead to Problems
Many covenant breaches stem from the same recurring issues. Recognizing them early helps you focus attention where it matters most.
It's helpful to remember that covenants aren’t just legal language; they’re benchmarks lenders use to measure risk. Overlooking them can create problems even when a business is otherwise healthy. There are three types of covenants to keep in mind:
Financial maintenance covenants: Debt service coverage ratios, minimum net worth thresholds, and restrictions on leverage or borrowing capacity.
Affirmative covenants: Regular delivery of financial statements, maintaining insurance coverage, paying taxes, and other obligations on time
Negative covenants: Restrictions on asset sales, limits on dividends or owner distributions, prohibitions on additional debt without consent
Each category brings its own challenges. Financial covenants can be affected by temporary downturns or unexpected expenses. Reporting covenants often fail because deadlines aren’t tracked carefully.
Operational restrictions may be violated when a business expands or restructures. Reviewing these clauses with counsel allows you to plan ahead rather than react after a lender raises concerns.
Practical Steps You Can Take to Reduce Breach Risk
Avoiding covenant violations usually involves consistent habits rather than drastic changes. Minor adjustments in how you monitor finances and communicate with lenders can go a long way.
Incorporate this approach into your regular business practices. Treat covenant compliance with the same routine attention as payroll or taxes.
For regular financial monitoring: Track covenant-related ratios monthly, not just at year-end, compare actual performance against loan thresholds, and address downward trends early
For clear internal responsibility: Assign one person to oversee loan compliance, keep covenant summaries accessible to leadership, and schedule reminders for reporting deadlines
For open lender communication: Notify lenders early if issues may arise, request waivers or amendments before a breach occurs, and document all communications
Taking these steps doesn’t eliminate every risk, but it places you in a stronger position. Lenders are often more receptive when borrowers are proactive and transparent. Experienced business law attorneys can help frame communications and requests to protect your interests while preserving the relationship.
Reviewing and Negotiating Covenants Before Signing
Many problems begin at the outset of a financing agreement. Borrowers may focus on interest rates and repayment terms while skimming the covenant language, which can later become restrictive.
Before agreeing to a loan, a careful review can reveal clauses that may not align with your business model or growth plans. This stage is also when there’s the most leverage to seek changes.
Specific areas to examine include how financial ratios are calculated, how often reports are due, and what remedies apply if a covenant is breached. Even modest adjustments, such as additional cure periods or more precise definitions, can reduce future risk.
The Law Offices of Peter V Lathouris LLC works with clients during this phase to identify red flags and suggest revisions. Our involvement helps borrowers make informed decisions rather than accepting terms that could hinder operations down the line.
What to Do If a Breach Is Likely or Has Already Occurred
Despite best efforts, circumstances can change. Economic shifts, customer losses, or unexpected expenses may push a business close to violating a covenant. Acting quickly matters.
If a breach seems likely, early legal advice can help you evaluate options. These may include requesting a waiver, renegotiating terms, or restructuring obligations. Timing and tone are critical, as lender responses often depend on how the issue is presented.
If a breach has already occurred, ignoring it rarely helps. Lenders usually discover violations through required reporting. Addressing the issue with a clear plan shows good faith and may limit negative consequences.
Having counsel involved helps protect your rights and avoid missteps that could worsen the situation. The goal isn’t just damage control—it’s finding a path forward that supports the business’s stability.
Speak With a Business Financing Lawyer About Your Options
Loan covenants don’t have to be a constant source of worry. With careful review, ongoing monitoring, and timely advice, many breaches can be avoided or resolved before they threaten your business.
The Law Offices of Peter V Lathouris LLC assists clients in Stamford, Connecticut, and the surrounding areas of Fairfield and New Haven, including Darien, Greenwich, Norwalk, Danbury, and Westport, with commercial financing concerns and covenant compliance issues.
Our firm helps business owners evaluate agreements, address lender concerns, and plan for growth with greater confidence. If you’re facing questions about loan covenants or want help reviewing an existing agreement, reach out to schedule a conversation and take the next step toward protecting your business.