Page 4 of your term sheet. The section is titled “Financial Covenants.” There are five numbered paragraphs, each containing a ratio you have never seen in your management accounts. Your accountant is cc’d on the email but has not opened it yet.
Covenants are the rules your bank writes into the loan agreement. Break one and the bank can call the loan, freeze further drawdowns, or renegotiate your terms from a position of strength. They come in two families: financial covenants (quantitative tests on your numbers) and operational covenants (restrictions on your behavior).
But here is what most borrowers miss: covenants are not punishments. From the bank’s perspective, they are an early warning system. They trigger a conversation before things get bad enough for a real default. The bank would rather renegotiate your terms at 3.5x leverage than discover at 5.0x that you cannot repay. Understanding this logic changes how you read them and how you negotiate them.
Most Belgian KMO term sheets contain 3 to 5 covenants. If you see 7 or more, the bank considers you higher risk. This guide covers every type you are likely to encounter, what the bank is monitoring with each one, and where you have room to negotiate. For a broader overview of how covenants fit into the full term sheet, see our term sheet reading guide.
How covenants are tested
Financial covenants are tested on specific dates, typically quarterly or semi-annually, based on your management accounts. Some banks test only annually based on audited financials. Annual testing is a concession worth negotiating because it gives you more time to manage seasonal dips.
At each testing date, you (or your accountant) must deliver a compliance certificate. This is a signed document confirming that you have met all covenant thresholds. The bank does not check your books directly. They rely on what you report. If you miss the delivery deadline, that alone is a technical default, even if every ratio is within range. Make sure your accountant knows the covenant definitions and the reporting schedule from day one.
Smart CFOs manage their balance sheet around testing dates. Pay down your revolving facility before quarter-end. Defer a large capex payment to the day after testing. This is not manipulation. It is standard practice, and your bank knows you do it.
Financial covenants: the numbers your bank watches
Leverage ratio (Net Debt / EBITDA)
The most common covenant in Belgian SME lending. It measures how many years of earnings it would take to repay your debt. Typical thresholds: 2.5x to 4.0x depending on sector and deal size. Manufacturing businesses with strong asset backing often negotiate 3.5x or higher. Service businesses with lighter balance sheets get tighter limits (2.5x to 3.0x).
The definition of “Net Debt” matters as much as the threshold. Does it include leases (IFRS 16 can inflate this significantly)? Shareholder loans? Intercompany debt? Undrawn committed facilities? Each inclusion changes the number. Read the definition clause word by word and map it to your own balance sheet before you sign.
Interest coverage ratio (ICR)
EBITDA divided by interest expense. Tests whether you earn enough to service your debt. Minimum thresholds are typically 2.5x to 4.0x. The question to ask: does the bank use gross interest expense or net of interest income? And is it based on trailing 12 months or annualized quarterly? The annualized quarterly method can produce volatile results if your revenue is seasonal.
Debt service coverage ratio (DSCR)
Stricter than ICR because it includes principal repayments in the denominator, not just interest. DSCR thresholds of 1.10x to 1.30x are standard. A DSCR of 1.10x means for every €1 of debt payments, your business generates €1.10 in cash. That is a thin margin. One bad quarter and you breach.
Solvency / equity ratio
Equity divided by total assets. Belgian banks frequently require a minimum of 25% to 30%. This is a balance sheet test, not an income test, which means it can deteriorate even when your business is profitable if you are carrying accumulated losses or if IFRS 16 lease capitalization inflates your total assets. Companies on Belgian GAAP and IFRS will show different solvency ratios for the same underlying business. Clarify which accounting standard the covenant uses.
Minimum EBITDA
Not a ratio but an absolute floor. “Your EBITDA must not fall below €X.” Common in Belgian KMO loans under €500K where the absolute size of the business matters more than ratios. The threshold is usually set at 70% to 80% of your projected EBITDA. The risk: if your projections were optimistic, this floor is closer than it looks.
Maximum capex
“Capital expenditure shall not exceed €X per year.” The covenant that most directly conflicts with growth. A company that needs to invest €200K in new equipment but has a €150K capex limit is stuck. Negotiate a “permitted capex” basket that accommodates your investment plan, and ask for an annual carry-forward of unused capacity.
Other financial covenants
You may also see: net debt cap (total net debt shall not exceed €X, an absolute ceiling), minimum cash / liquidity (maintain a cash balance of at least €X at all times, increasingly common post-COVID), debt-to-equity ratio (different from leverage because it uses balance sheet equity, not EBITDA), and dividend restrictions expressed as a financial test (“dividends not to exceed X% of net profit”).
Key takeaway: The most dangerous financial covenant is the one with a definition you did not read carefully. “EBITDA” in your loan agreement may not match the EBITDA in your management accounts. Always map the covenant definition to your own reporting before you sign.
The EBITDA definition trap
This deserves its own section because it is the single most common source of covenant disputes. “EBITDA” in your loan agreement is almost never the EBITDA from your income statement. It is a defined term with specific add-backs and exclusions.
Common add-backs the bank may or may not include: one-off restructuring costs, acquisition expenses, non-recurring legal fees, and share-based compensation. Common exclusions: gains on asset sales, one-time income, revaluation gains. The bank’s analyst builds a model using their definition. You build your projections using yours. If those definitions differ, your headroom is not what you think.
Before signing, take the bank’s EBITDA definition and recalculate your last three years of financials using it. If the number is materially different from your management EBITDA, negotiate the definition. This is especially important for companies with significant non-cash charges, IFRS 16 adjustments, or frequent one-off items.
Operational covenants: the rules on your behavior
Operational covenants restrict what you can do without the bank’s consent. Unlike financial covenants, they have no numerical thresholds. You either comply or you do not. These are the covenants that founders most often overlook, and most often breach.
Change of control
If ownership of the company changes beyond a defined threshold (typically 50%), the bank can demand immediate repayment. This matters if you are planning to bring in investors, restructure your shareholding, or eventually sell the business. The threshold and definition vary: does “control” mean voting rights, economic ownership, or board seats? Does it apply to direct ownership changes only or also to changes at the parent company level?
Negotiate carve-outs for transfers between existing shareholders, transfers to family members, and internal restructurings that do not change ultimate beneficial ownership. If you are actively seeking investors, flag this to the bank at the term sheet stage. A change-of-control clause can kill your funding round.
Negative pledge
You agree not to grant security over your assets to other creditors. This effectively gives your bank first claim on everything you own, even without a specific mortgage or pledge. The problem: it can prevent you from raising additional secured debt, including trade finance and equipment leasing.
Push for “permitted security” baskets. Standard carve-outs include: trade finance and letter-of-credit facilities, equipment leasing up to a defined threshold (e.g., €100K per year), liens arising by operation of law (tax liens, retention of title), and security over assets acquired with the proceeds of permitted additional debt.
Additional indebtedness restriction
Limits how much new debt you can take on. The definition of “indebtedness” is critical: does it include leases, deferred purchase consideration, shareholder loans, or guarantees to third parties? Negotiate a “permitted debt” basket with specific carve-outs for trade credit, intercompany loans, and refinancing of existing debt.
Dividend restriction
This one hits Belgian owner-managers hardest. Many business owners draw a significant portion of their income as dividends. A blanket prohibition is excessive. Negotiate a permitted dividend basket: dividends allowed up to 30% to 50% of net profit, provided no default exists and financial covenants are met with headroom.
Anti-disposal
Cannot sell assets above a threshold without bank consent. Critical if you might want to divest a business unit, sell equipment, or restructure. Negotiate a “permitted disposals” basket with an annual threshold (e.g., €50K to €100K) and a carve-out for sales in the ordinary course of business.
Information covenants
Deadlines for delivering financial statements. Typical schedule: audited accounts within 90 to 120 days of year-end, management accounts within 45 to 60 days of each quarter-end, compliance certificates at each testing date, and immediate notification of any material event or potential default. Missing a reporting deadline is the most common technical default in Belgian SME lending. Align every deadline with your actual audit and reporting schedule and add a 15-day buffer.
Material adverse change (MAC)
The bank can call the loan if there is a “material adverse change” in your financial condition. This is the vaguest and most dangerous operational covenant. If “material” is not defined numerically, the bank has broad discretion to trigger it. Push for a specific threshold (e.g., a 25% decline in EBITDA over two consecutive quarters) rather than subjective language. We cover MAC clauses in detail in our red flags guide.
Other operational covenants
You may also encounter: key person clause (if the founder/CEO leaves, the bank can trigger a review), insurance covenant (maintain specific policies with minimum coverage, name the bank as co-insured), cross-default (default on any other debt triggers default here; watch the breadth), pari passu (promise that this loan ranks equally with your other unsecured debt), and environmental/ESG covenants (certify regulatory compliance; some Belgian banks now tie margin adjustments to sustainability metrics).
Key takeaway: Operational covenants are the ones founders most often overlook, and most often breach. A change-of-control clause can block your funding round. A dividend restriction can disrupt your personal cash flow. An information covenant with a deadline your auditor cannot meet puts you in technical default from day one. Read every line.
What happens when you breach a covenant
A breach does not mean the bank calls your loan the next morning. In practice, most breaches follow a predictable sequence: notification, cure period, waiver negotiation, and (only in the worst case) acceleration.
First, you notify the bank (you are required to under your information covenant). Then the cure period starts, typically 30 days. During this window, you can fix the breach. If you cannot fix it in time, you request a waiver. The bank will typically grant it, but not for free. Expect a waiver fee (€1,000 to €5,000), tighter covenant levels going forward, additional security, or a margin increase.
The bank only accelerates (demands full repayment) when the breach is severe, repeated, or when your financial situation has deteriorated to the point where they want out. In 25 years of Belgian banking, immediate acceleration on a first-time technical breach is extremely rare. The bank wants to be repaid, not to push you into insolvency.
That said, once you breach, you lose negotiating power. The bank can use the breach to renegotiate everything: margin, fees, collateral, reporting frequency. This is why headroom matters. Staying well above your covenant thresholds keeps you in the driver’s seat.
How to negotiate covenants
Test every covenant against your own forecast with a 20% downside buffer. If you breach in a mild stress scenario, the threshold is too tight. For leverage covenants, negotiate 0.25x to 0.50x above your projected level. If you project 2.5x at year-end, ask for 3.0x. For coverage ratios, push the minimum threshold down to a level that gives you room in a slow quarter.
Negotiate equity cure rights. This means the ability to inject cash as equity to fix a ratio breach. If your leverage spikes to 3.6x against a 3.5x covenant, you can inject €50K as a shareholder loan (subordinated) to bring it back in line. Banks typically allow 2 to 3 equity cures over the loan life. This is your safety valve.
Push for covenant holidays in the first 6 to 12 months if you are funding a growth phase where metrics will temporarily worsen. During the holiday, covenants are not tested. The bank gets monitoring rights (monthly reporting, management meetings) instead of hard triggers.
And involve your accountant from the start. They prepare the compliance certificate. They need to understand how “EBITDA,” “Net Debt,” and “Equity” are defined in the agreement, not just in your management accounts. The first testing date should not be the first time they see the definitions. For more detailed negotiation tactics, see our negotiation guide.
Frequently asked questions
How many covenants is normal?
For Belgian KMO loans, 3 to 5 covenants is standard. The typical package includes one leverage ratio (Net Debt / EBITDA), one coverage ratio (ICR or DSCR), one balance sheet test (solvency), plus information covenants. If you see 7 or more, the bank rates you higher risk.
Can covenants change after signing?
The original covenants are fixed in the loan agreement. However, they can be amended by mutual consent (with an amendment fee). And if you breach, the bank can negotiate tighter levels as a condition for granting a waiver. Covenants only get looser if you have leverage, typically through a competing refinancing offer from another bank.
Do all Belgian banks use the same covenants?
No. KBC tends to use simpler packages for Flemish SMEs with established histories. BNP Paribas Fortis leans toward more standardized documentation from the parent company. ING Belgium uses more structured covenant grids for mid-market deals. Belfius is moderate. The number and strictness of covenants varies by bank, deal size, sector, and your relationship.
What is a covenant waiver?
A formal agreement from the bank to overlook a specific breach. You request it in writing, explaining what happened and why it will not recur. The bank charges a waiver fee and may impose tighter conditions. A waiver is not a reset. It is a concession that reduces your future negotiating power.
How does Credia help with covenant analysis?
Upload your term sheet. Credia extracts every covenant, identifies the type, and benchmarks the thresholds against Belgian market data for your deal profile. You see exactly which covenants are standard and which are aggressive. The analysis takes 30 seconds.
What to do next
Take your term sheet’s EBITDA definition and recalculate your last three years using it. If the numbers differ from your management accounts, negotiate the definition before anything else.
Then upload your term sheet to Credia for a benchmark of every covenant against Belgian market data. Check our red flags guide for covenant-related warning signs, and our negotiation guide for specific tactics to push back on thresholds, definitions, and cure rights.