Hong Kong SME monitoring guide · Free covenant checklist
Financial covenants for SME loans in Hong Kong
A financial covenant is a promise in the loan agreement that the borrower’s numbers will stay within agreed limits. It gives the lender an early signal and a right to act before the borrower misses a payment.
Core definitions
Put similar concepts in the right place
Each component solves a different problem. Complete lending operations depend on clear data and workflow hand-offs.
| Item | What it does in practice |
|---|---|
| 01Debt-service cover (minimum) | Requires the cash generated to cover debt payments by a set margin. |
| 02Leverage (maximum) | Limits how much the borrower owes relative to its earnings or its net worth. |
| 03Current ratio (minimum) | Requires current assets to cover current liabilities by a set margin. |
| 04Interest cover (minimum) | Requires earnings to cover interest costs by a set margin. |
| 05Dividend and distribution limits | Restrict payments to owners while the loan is outstanding, or unless a ratio is met. |
| 06Information covenants | Require the borrower to deliver accounts and certificates by set dates. |
Background
Covenants, conditions and breaches
Covenants are easy to write and harder to run. This section explains the kinds of promise in an SME loan and what happens when one is broken.
Three kinds of promise
Conditions precedent come before drawdown. Financial covenants are tested while the loan is outstanding. Information covenants require accounts and certificates on time. They are enforced differently, so they are best recorded separately.
Testing is a process, not a calculation
The calculation is the easy part. The hard part is getting the borrower’s numbers on time, in the form the agreement defines, and checking them. A covenant without a collection process works only when someone remembers.
A breach is not a default
A breach gives the lender options. It does not oblige the lender to demand repayment. Most breaches in SME lending end in a conversation, a change to the terms or a waiver. What matters is that the lender chose, and that the choice is on record.
Why record the waiver
A waiver that is not recorded can be forgotten, repeated or disputed. A recorded waiver shows who agreed, to what, and until when.
Book an SME lending walkthrough
A working session on how your covenants are recorded and tested.
Workflow
The life of a covenant
- 01
Agree the covenants at approval
Set which ratios, what levels, how they are defined and when they are tested.
- 02
Record them on the facility
Enter each covenant with its definition, level and test date.
- 03
Collect the numbers
Obtain the accounts or certificate the test needs, on the date it is due.
- 04
Run the test
Calculate the ratio the way the agreement defines it and compare it with the limit.
- 05
Handle a breach
Record the breach, the cure deadline and the lender’s response.
- 06
Record a waiver or amendment
If the lender agrees not to act, record who approved it, on what terms and for how long.
Printable worksheet
Free: 10-point covenant tracking checklist
Use it on a recent SME facility with covenants. This is an operational self-assessment, not legal advice.
Practical evaluation
Three things that make covenants work
A covenant you cannot test is not a covenant
If the agreement defines a ratio in a way the data cannot produce, the lender will argue about the number instead of acting on it.
Waivers need an end date
A waiver without a term quietly turns a covenant into a suggestion.
Early signals are the point
The value of a covenant is the warning it gives. A breach found six months late has lost most of its value.
Frequently asked questions
Quick answers
What is a financial covenant?
A financial covenant is a term in a loan agreement that requires the borrower to keep a financial measure, such as a ratio, within an agreed limit.
What happens if a covenant is breached?
The agreement says. Common responses are a cure period, a change in the terms, a waiver or, in serious cases, a demand for repayment. The lender decides, and should record the decision.
What is the difference between a covenant and a condition precedent?
A condition precedent must be met before the lender will lend. A covenant applies once the loan is outstanding.
Does Covenant Desk track covenants?
Yes. Covenant Desk records financial covenants and conditions on each facility, runs covenant tests when a user starts them, and logs breaches and approved waivers.
Primary sources
Official sources and editorial note
This guide reflects official material available on the review date. Requirements can change; each institution should check the latest licence conditions and obtain legal or compliance advice. This page is not legal advice. Read our editorial and corrections policy.
Next step
See covenants recorded, tested and waived on one facility.
Talk to us about your SME covenants, or try the Covenant Desk platform that records them.
Covenant Desk is lending operations software. It does not provide loans, issue credit reports or replace the lender’s final credit decision.