What is the difference between a financial covenant and a nonfinancial covenant in lending?

What is the difference between a financial covenant and a non-financial covenant in lending Introduction: The Significance of Covenants in Lending Hello everyone, and welcome to today's video! When it comes to lending, covenants act as essential safeguards for both borrowers and lenders. They are contractual agreements that outline certain conditions and requirements that the borrower must adhere to throughout the loan term. While covenants can encompass various aspects, such as reporting obligations and operational restrictions, one crucial distinction lies in the division between financial and non-financial covenants. Today, we'll be focusing on understanding the nuances between these two categories. Financial Covenants: A Numbers-Based Approach Financial covenants, as the name suggests, revolve around the borrower's financial performance and metrics. These covenants are typically quantitative in nature, involving specific numerical thresholds that the borrower must meet. Common examples of financial covenants include debt-to-equity ratios, interest coverage ratios, and minimum cash balance requirements. By incorporating these covenants, lenders aim to ensure that the borrower maintains a certain level of financial stability throughout the loan term. This, in turn, safeguards the lender's interests and mitigates the risk of default. Non-Financial Covenants: A Broader Scope