What do loan covenants typically require from the borrower?

Loan covenants serve as protective measures for lenders, aiming to ensure that borrowers maintain certain standards that support their ongoing creditworthiness. By restricting behaviors that could negatively impact the borrower's financial condition, covenants help safeguard the lender's investment. These restrictions might include limits on additional debt, requirements to maintain certain financial ratios, or prohibitions against certain business activities that might jeopardize the company’s ability to repay the loan.

While some options might seem relevant, they don't capture the primary purpose of loan covenants as effectively. Investment in research and development, for instance, is not a standard requirement imposed on borrowers through covenants, as these agreements typically focus more on financial stability and risk management than on specific operational strategies. Similarly, mandates for monthly payment increases are not common in loan covenants, as payment terms are usually fixed at the loan's inception. Government oversight may relate to regulatory compliance, but it is not a function of typical loan covenants, which are mainly private contractual arrangements between lenders and borrowers. Thus, the emphasis on behaviors that may affect creditworthiness is the defining characteristic that makes the correct choice apparent.