[IMGCAP(1)]One time, one of my clients had a very large equipment term loan from a bank and was in danger of being put out of business because the company had blown an essential loan covenant.
A covenant is a condition the lender must meet or the bank has the right to call the loan. Most businesses that borrow cannot pay loans back on demand. Instead, they are paid out of future profits that have hopefully been generated from the added business the loan helped to achieve. In this case, the covenants to maintain net worth and working capital were violated. The company had losses because of noncash charges dictated by accounting rules.
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