What loan covenants should I expect when financing a business acquisition?

A loan covenant is a promise the borrower makes in the loan agreement. It may require something, such as keeping the business insured, or restrict something, such as taking on other debt. Lenders draft their own agreements, so there is no standard list to quote. What public guidance does show is the kinds of conditions a federal loan program attaches to the loans it covers, and those give you a checklist for reading any term sheet.

Security over the business

The Canada Small Business Financing Program guidelines say that since July 4, 2022, when a term loan finances software, leasehold improvements, intangible assets or working capital costs, the lender must take security on any assets of the small business, for example under a general security agreement. They also say personal assets cannot be used to secure a loan under the program. Another lender’s requirements may differ, so ask which assets it will take and whether you may give security to anyone else.

Guarantees

The same guidelines say a lender can take unsecured personal guarantees up to the original amount of the loan disbursed, that liability may be joint and several or individual where more than one person guarantees, and that guarantors and guarantees may be released or reduced if the loan is in good standing. See how to negotiate a cap on a personal guarantee.

Repayment, changes and early demand

BDC says its purchase or transfer loan offers interest-only payments at the start and repayment options based on cash flow, and that it will not change its terms or demand early repayment without a valid reason. Ask any lender the same thing in writing: what events let it demand repayment, and whether you get a chance to fix a breach first.

Questions to put to the lender

• Does the agreement limit owner draws, dividends or management fees while the loan is outstanding?
• What financial statements must you deliver, and how often?
• Are there financial tests, and how are they calculated and measured?
• Does it restrict other borrowing, including payments on a vendor take-back note?
• What counts as a default, and can you cure it?