We are going to break down each one of these in future posts (which can be found in our Venture Debt Terms section), but here is an overview of covenants for venture debt loans:
- Financial covenants: a. Minimum cash balance: The borrower must maintain a specified minimum cash balance to ensure adequate liquidity. b. Revenue growth: The borrower must achieve specific revenue milestones to demonstrate growth and progress. c. EBITDA (earnings before interest, taxes, depreciation, and amortization) or profitability covenants: The borrower may need to maintain a minimum level of profitability or EBITDA.
- Operational covenants: a. Reporting requirements: The borrower is typically required to provide regular financial and operational updates, such as monthly or quarterly financial statements and annual audited financials. b. Milestone-based covenants: The borrower may need to meet product development, customer acquisition, or other operational milestones as a condition of the loan. c. Material changes: The borrower may be required to obtain the lender’s approval before making significant changes to its business, such as mergers, acquisitions, or divestitures.
- Negative covenants: a. Debt restrictions: The borrower may be prohibited from incurring additional debt without the lender’s consent. b. Dividend restrictions: The borrower may be restricted from paying dividends or making other distributions to equity holders while the loan is outstanding. c. Asset sales restrictions: The borrower may be limited in its ability to sell or dispose of assets without the lender’s approval.
- Security and collateral: a. Security interest: The lender may require a security interest in the borrower’s assets, including intellectual property, to secure repayment of the loan. b. Negative pledge: The borrower may be prohibited from granting liens or security interests in its assets to other lenders without the venture debt lender’s consent.
- Events of default: a. Failure to make payments: If the borrower fails to make principal or interest payments when due, the lender may declare an event of default and accelerate the loan. b. Breach of covenants: If the borrower breaches any of the covenants in the loan agreement, the lender may declare an event of default.