Covenants in Finance: What Australians Need to Know in 2025

In 2025, Australian borrowers and investors face a rapidly evolving landscape shaped by rising interest rates, tighter bank scrutiny, and a renewed focus on risk management. One factor working quietly behind the scenes, yet with outsized influence, is the humble covenant. Whether you’re a business owner negotiating a commercial loan or a property investor seeking funding, understanding covenants is now essential for making smart, forward-thinking decisions.

What Are Covenants, and Why Do They Matter?

Covenants are contractual promises or restrictions set by lenders or investors, baked into loan agreements or investment deals. They’re there to protect the interests of the party providing the capital, ensuring borrowers operate within certain financial or operational boundaries.

• Positive covenants require borrowers to do something (e.g., maintain insurance, provide regular financial statements).

• Negative covenants prohibit certain actions (e.g., taking on new debt, selling major assets without consent).

• Financial covenants set benchmarks — like a minimum interest coverage ratio or a maximum loan-to-value ratio.

In 2025, Australian lenders are especially vigilant. With APRA (Australian Prudential Regulation Authority) signaling stricter oversight and banks contending with global economic uncertainty, covenants are increasingly used as early warning systems. Breaching a covenant can trigger penalties, higher interest rates, or even loan recalls — so it pays to keep them front of mind.

2025 Trends: Tighter Covenants and More Scrutiny

This year has seen a marked shift in how covenants are used in Australia. Here are the key developments:

• More granular financial covenants: Lenders are specifying detailed metrics, such as EBITDA thresholds and rolling liquidity ratios, not just generic profitability targets.

• Frequent reporting requirements: Borrowers may need to provide quarterly (or even monthly) updates, reflecting lenders’ desire for real-time risk monitoring.

• Greater use of material adverse change (MAC) clauses: These let lenders take action if there’s a significant negative shift in the borrower’s circumstances — an echo of pandemic-era risk management, but now common in commercial property and SME lending.

For example, a Melbourne-based logistics company recently refinanced its fleet with a major bank. The deal included covenants requiring the business to maintain a debt-to-EBITDA ratio below 3.0 and provide monthly cash flow statements. When the company’s margins tightened due to fuel price spikes, it had to negotiate a waiver to avoid default.

Negotiating and Managing Covenants: Real-World Strategies

While covenants can feel restrictive, they’re not set in stone. Savvy borrowers and investors approach them as points for negotiation, not just legal hurdles to clear. Here’s how Australians are navigating the new normal:

• Early engagement: Involving legal and financial advisers before signing a loan agreement can help tailor covenants to fit your business cycle and sector volatility.

• Scenario planning: Build financial models that test how your covenants would hold up under various scenarios — rising rates, supply chain disruptions, or sudden downturns.

• Open communication with lenders: Transparency is key. Lenders are more likely to grant waivers or amendments if you’re proactive about potential breaches, rather than hiding bad news until it’s too late.

• Leverage for better terms: If your business has strong fundamentals, use that as leverage to negotiate looser covenants or longer cure periods.

On the investment side, fund managers are increasingly scrutinising covenant quality in property and infrastructure deals. In 2025, ‘covenant-lite’ structures are rare for all but the most creditworthy borrowers.

What to Watch: Regulatory and Market Shifts

The regulatory environment is also shifting. APRA’s 2025 guidance encourages lenders to use covenants as part of their risk-based approach, rather than relying solely on property values or historical performance. Meanwhile, ASIC has warned that investment schemes with weak or poorly disclosed covenants could face enforcement action.

For everyday Australians, this means:

• Expect more questions (and paperwork) when applying for business or property loans

• Be wary of deals that seem too flexible — lenient covenants can signal higher risk or hidden costs

• Understand the triggers for covenant breaches and the remedies available

With economic volatility lingering, covenants are more than just fine print. They’re the rules of the financial game in 2025 — and those who play them smartly will be best placed to grow and protect their wealth.