What is the difference between a financial covenant and a restrictive covenant in a loan agreement?

What is the difference between a financial covenant and a restrictive covenant in a loan agreement Introduction: The Significance of Loan Agreements Hello, everyone! Loan agreements are the backbone of financial transactions. They outline the terms and conditions between a borrower and a lender, ensuring both parties are on the same page. Within these agreements, we often come across two vital components: financial covenants and restrictive covenants. While they may sound similar, they serve distinct purposes. Today, we'll explore their differences and shed light on their individual roles. So, let's get started! Defining Financial Covenants: A Focus on Financial Health Financial covenants primarily revolve around a borrower's financial health. They act as benchmarks, ensuring the borrower maintains certain financial ratios or meets specific financial targets. These targets could include metrics like debt-to-equity ratio, interest coverage ratio, or even minimum cash reserves. By including these covenants, lenders aim to protect their investment and ensure the borrower's financial stability throughout the loan tenure. Understanding Restrictive Covenants: Beyond Finances