Organisations usually enter into lending agreements when they borrow from financial institutions. Financial institutions often include borrowing covenants in their loan contracts.
In summary, borrowing covenants are predefined conditions to be met by the borrower as part of a lending agreement. They include financial ratios such as liquidity, solvency, interest coverage, and total assets to debt ratios. These ratios are included in lending arrangements by lenders to ensure repayment of their loans in accordance with the lending agreement.
