Conventional financing covenants

June 30, 2025

by a searcher from Dartmouth College - Tuck School of Business at Dartmouth in Lima, Peru

Hi! Does anyone has experience with conventional financing for funding instead of SBA loans? I want to understand what kind of covenants and ratios are usually applied. For example, many years ago I remember a company I worked for, had to comply with a Debt/EBITDA ratio of 3.5x every quarter. That is what I am looking for.

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Reply by an investor
from Harvard University in 150 Washington Ave #201, Santa Fe, NM 87501, USA

You will typically have a Debt/EBITDA covenant and a Fixed Charge Coverage (FCC) covenant. The former will step down over time, the latter will step up. You want to model out a 20-30% cushion to a reasonably conservative forecast in each quarter for the five year term loan. Choose a lender who will work with you constructively if you miss a covenant, based on references, etc.

Reply by a searcher
from Indiana University, Bloomington/Indianapolis in Chicago, IL, USA

You will likely have a Debt Service Coverage Ratio (DSCR) test annually and a minimum net worth test annually. Some conventional lenders will want to have an excess cash flow sweep to pay down principal. All are negotiable. 1.2x to 1.5x is a likely range for DSCR test###-###-#### Calculated as EBITDA / Annual Debt Service (principal and interest). If you fall below 1.0x, you are not able to pay your debt service. So, when you fall below the test of 1.2x, you will likely be in default and have some remedies at hand to cure the default. Remedies can include principal paydown or implementation of a cash flow sweep into a "lockbox"

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