What’s the difference between a positive covenant and a negative covenant?

A positive covenant is when the company agrees to take certain actions for the duration of the loan. This can could include maintaining adequate insurance plans, performing plant and equipment repairs and upgrades, disclosing audit reports, or achieving a certain threshold in key financial ratios.

A negative covenant prevents the company from performing certain actions during the duration of the loan, such as paying dividends, selling certain assets, performing certain types of acquisitions, raising new debt, or raising debt that’s more senior to the current lender.

If the company breaches either a positive or negative covenant during the duration of the loan, the company will be technically in default and be forced to renegotiate terms with the lender.