Which combination of covenants are commonly found in commercial loan agreements?

• A. Financial covenants, liquidity ratios; affirmative covenants; negative covenants; capex restrictions; debt incurrence; change in control
• B. Covenants related to marketing only
• C. Covenants related to personal wealth only
• D. Affirmative covenants only

Answer: (C)

Covenants in commercial loan agreements are tools to manage risk by setting clear expectations and boundaries for the borrower. The most common and effective mix includes three broad types: affirmative covenants that require the borrower to do things, negative covenants that restrict actions, and financial covenants that tie performance to measurable targets such as liquidity or leverage. In addition, lenders frequently include specific restrictions like capex limits, limits on incurring new debt, and provisions triggered by changes in control. This combination provides ongoing oversight of both the borrower’s operations and its capital structure, making it the typical and robust set found in commercial loans. Other options focusing solely on marketing or personal wealth, or only affirmative covenants, miss essential protections and are not representative of standard commercial lending practice.