Negative Covenants

Last Updated: Jun 7, 2019

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A negative covenant is a clause in a loan agreement that prohibits the borrower from engaging in certain activities.

For example, negative covenants can specify that the borrower will not incur any new debt or will not pay dividends to its shareholders without the lender’s consent. Lenders use negative covenants to reduce their risk by limiting actions that could potentially result in the lender not being paid in full.