What is the difference between a financial covenant and a performance covenant?

What is the difference between a financial covenant and a performance covenant Introduction: The Significance of Covenants in Financial Agreements Hello everyone, and welcome to today's video. When it comes to financial agreements, covenants are like the guiding principles that ensure the interests of all parties involved. They act as a safeguard, providing a framework for the borrower and the lender. However, within the realm of covenants, there are two distinct types: financial covenants and performance covenants. Today, we'll be exploring the differences between these two and understanding their implications. So, let's dive in! Financial Covenants: Focusing on the Numbers Financial covenants, as the name suggests, revolve around the financial aspects of an agreement. They are primarily concerned with the borrower's financial health and stability. These covenants often include metrics like debt-to-equity ratio, interest coverage ratio, or even cash flow requirements. The purpose of these covenants is to ensure that the borrower maintains a certain level of financial viability throughout the agreement's duration. By doing so, the lender minimizes the risk of default and protects their investment. Performance Covenants: Evaluating Operational Success