What do covenants in a loan agreement outline?

Covenants in a loan agreement are essential provisions that outline specific requirements and restrictions that a borrower must adhere to throughout the duration of the loan. These can include financial metrics that the borrower must maintain, such as minimum levels for liquidity or profitability, and operational restrictions, which might limit additional borrowing, asset sales, or changes in business strategy.

The purpose of these covenants is to protect the lender's investment by ensuring that the borrower remains financially stable and operates within a framework that is conducive to paying back the loan. Should the borrower breach any covenant, it could trigger various consequences such as default, increased interest rates, or the lender's right to call the loan.

While other options mention important aspects of a loan, such as interest rates and repayment schedules, these do not pertain to the specific conditions imposed on a borrower that covenants represent. Covenants focus on maintaining the borrower's financial health and operational integrity rather than the basic terms of the loan itself or the processes involved in obtaining one.