• Covenants . Covenants are the borrower’s promises to do something in the future (“affirmative covenants”) or to not do something in the future (“negative covenants”). Affirmative covenants include: the maintenance of corporate or business existence; the maintenance of a set amount of working capital; the continuing payment of other debts and obligations of the business so as not to adversely affect its existence or ability to operate as a going concern; the maintenance of collateral; the maintenance of insurance; the making of described schedules, financial and other reports to the lender. Negative covenants include: a restriction on the borrower taking on additional debt with another lender; a restriction on the lender paying out any dividends or distributions to shareholders over the life of the loan except as agreed to by the lender; a prohibition on increasing the salaries of employees; a prohibition on extraordinary transactions like mergers, acquisitions, or reorganizations. Covenants exist to serve a number of objectives of the lender: ▪ To ensure that the borrower makes full disclosure of information necessary for the lender to have control over the loan relationship. ▪ To ensure that the borrower exists and continues as a viable business. ▪ To ensure that adequate cash flow is maintained. ▪ To ensure that adequate asset quality and collateral quality are maintained. ▪To ensure management’s attention to the business and to repayment of the loan with any interest and fees.
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