The worst time to discover a covenant breach is when you sign the compliance certificate.
List every covenant in your facility agreements with its definition, test date and threshold, calculate current headroom, and forecast each covenant forward using your cash and profit forecast. Flag any forecast test with less than your target headroom so you can act, or talk to the lender, well before the test date.
| Covenant | Usual definition | Typical direction |
|---|---|---|
| Leverage | Net debt ÷ EBITDA | Must stay below a maximum |
| Interest cover | EBITDA ÷ net interest | Must stay above a minimum |
| Debt service cover | Cash available for debt service ÷ debt service | Must stay above a minimum |
| Minimum liquidity | Cash plus undrawn committed facilities | Must stay above a minimum at all times or at test dates |
Always use the definitions in your own agreement. "EBITDA" in a facility agreement often adds back or excludes items differently from your management accounts.
Headroom is how far results could move before the covenant breaks. Example: the leverage covenant is a maximum of 3.0 times, net debt is 5.4 million and EBITDA is 2.0 million.
Ten per cent headroom is thin if the business is seasonal or a large customer is at risk.
Run each covenant through your forecast for the next four test dates. Most breaches are visible months ahead in a decent forecast; they surprise people because nobody ran the calculation forward. Cash covenants, such as minimum liquidity, need testing against the weekly cash forecast, not only month-end balances.
See how to set a minimum cash buffer and how to build a 13-week cash flow forecast.
Covenant mechanics are similar in the UK and the US, but definitions vary by agreement. A breach at the reporting date can require long-term debt to be shown as current. Under IFRS a waiver generally has to be in place by the reporting date to avoid this, while US GAAP can allow a waiver obtained before the accounts are issued, so the timing of any waiver matters for the year-end accounts.
Work out DSO and the cash tied up in late payers. Free to use online.
The Cash Flow Forecasting & Liquidity Control System tests every week of a rolling cash forecast against your minimum cash buffer and lending covenants, and flags a breach before it lands. Excel, no macros, one-time price.
There is no standard figure. Set a target based on how volatile your results are, and treat any forecast test that falls below it as a warning that needs a plan.
The finance team prepares them from the agreement's definitions, and someone other than the preparer reviews them before the compliance certificate is signed.
Most are tested quarterly on the last twelve months' results, with a compliance certificate due a few weeks after the quarter end. Minimum liquidity covenants are sometimes tested at all times, which means every day counts, not only month end.
The lender usually gains rights such as charging fees, repricing or, in serious cases, demanding repayment. In practice most breaches end in a waiver or amendment, especially when raised early with a credible plan.
Last updated 18 October 2026. General guidance for finance teams; check it against your own policies, systems and local rules.