A loan covenant is a contractual condition that the borrower must satisfy through the loan term. Covenants protect the lender against deterioration in the borrower's financial position between submission and maturity.
Financial covenants are the most common: minimum DSCR, maximum LVR (re-tested through the term), minimum tangible net worth, maximum gearing. Operational covenants might include: keeping the property insured, maintaining lease agreements, providing audited accounts annually, notifying the lender of material events.
Covenant breaches don't automatically trigger default, they trigger a discussion. The lender's options on a breach are to waive (sometimes for a fee), reset the covenant, restructure the loan, or call the loan if the breach is material and uncurable. Most Australian commercial lenders treat covenants as early-warning indicators, not enforcement triggers, the goal is to surface problems early enough that they can be solved.
For Archer Wealth files, covenants are structured at submission to be realistic and tested through the term. Covenants we don't expect to be tested aren't worth writing in; covenants too tight to comply with create false breaches and burn relationship capital. The credit team's intention is for covenants to be informative tools, not gotchas.