You are reading the undertakings section of your term sheet. One of the conditions is the CapEx limitation covenant. Here is what it controls, why the bank includes it, and what to check before you sign.
What the bank is measuring
A CapEx limitation sets a maximum annual capital expenditure budget. Spending above this ceiling requires prior written lender approval.
What this means: Constrains investment in equipment, facilities, and technology upgrades. May force the business to defer maintenance or growth investments. The asset base may age relative to competitors.
What to check
Carry-forward: some agreements allow unspent CapEx to carry forward to the next year
Maintenance vs. growth CapEx: some agreements distinguish between required maintenance and discretionary investment
Currency: CapEx limits may be in a fixed currency — FX movements affect effective limit
How to negotiate
Most covenant terms are negotiable at the term sheet stage, before the legal documentation is drawn up. With the CapEx limitation covenant, focus on the definition, the threshold, the testing frequency, and the cure period. Ask your relationship manager what flexibility exists, and have your accountant confirm the level is one your business can hold comfortably. Read every line.
What to do next
The fastest way to see whether a CapEx limitation covenant — and every other condition — is in your term sheet is to let Credia read it for you. Upload the PDF and you get every covenant identified and explained, in plain language, in under two minutes.
Analyse your term sheetFrequently asked questions
What is a CapEx limitation covenant?
A CapEx limitation sets a maximum annual capital expenditure budget. Spending above this ceiling requires prior written lender approval.
What does a CapEx limitation covenant restrict?
Constrains investment in equipment, facilities, and technology upgrades. May force the business to defer maintenance or growth investments. The asset base may age relative to competitors.
Can you negotiate a CapEx limitation covenant?
Most covenant terms are negotiable at the term sheet stage, before the legal documentation is drawn up. With the CapEx limitation covenant, focus on the definition, the threshold, the testing frequency, and the cure period. Ask your relationship manager what flexibility exists, and have your accountant confirm the level is one your business can hold comfortably. Read every line.