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What is a Covenant?

A covenant is essentially a pledge that a borrower, like a trucking company, makes to a lender as part of a business loan agreement. It’s not just about repaying the loan; it involves adhering to certain conditions that ensure the trucking operation remains stable and capable of fulfilling its financial obligations.

Covenants are typically reviewed annually, and any breach can technically place the loan in default, emphasizing the importance of adherence.

Covenants are typically reviewed annually, and any breach can technically place the loan in default, emphasizing the importance of adherence.

Types of Common Covenants

  • Positive Covenants (Affirmative): These require the trucking business to perform specific actions, like maintaining insurance or delivering financial statements. For trucking businesses, this could mean ensuring all vehicles are insured and financial records are accurately maintained.
  • Negative Covenants: These prohibit certain actions, such as limiting dividend payments or restricting additional financial burdens. For trucking businesses, this could translate to restrictions on selling key assets like trucks or trailers.
  • Numerical or Financial Covenants: These are based on the trucking company’s financial performance, ensuring adequate cash flow is maintained for operations and loan repayments.

Understanding How Covenants Function:

In trucking business financing, covenants are part of the lending agreement, outlining the terms and conditions of the loan, which could include maintaining a certain level of cash flow or financial performance. They act as safeguards for both the lender and the borrower, ensuring the trucking company operates within certain financial parameters.

Why Covenants Matter in Trucking Business Loans:

Covenants serve a dual purpose. For lenders, they provide a layer of security for their investment. For trucking businesses, they offer a structured financial framework to operate within, ensuring financial stability and the ability to meet loan obligations. Every loan agreement made between a bank and a trucking company will carry some form of financial covenant to protect the bank’s interest. The exception to this rule are SBA loans, which never carry covenants.

Duration and Monitoring of Covenants:

The timeline of a covenant can vary based on its nature. Monitoring is typically done through regular reviews by the lending institution, ensuring the trucking business adheres to the agreed terms.

Consequences of Covenant Breaches:

Breaching a covenant can lead to several lender actions, from sending a notice for minor breaches to calling in the loan for more severe or unaddressed issues. It’s crucial for trucking businesses to understand and adhere to these covenants to maintain a healthy financial and operational status.

BLF is here to assist you

Our goal is to provide you with expert help and guidance for you needs. Whether you need funding or business services for your trucking company, you are in reliable hands.

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