Additional debt restriction

What Is an Additional Debt Restriction?

An additional debt restriction is a negative covenant in your loan agreement that prohibits you from incurring any new financial indebtedness without your lender's consent. It is not a financial metric you need to stay within — it is an outright prohibition on a category of action. If you breach it, you are in technical default even if your business is performing perfectly and you have never missed a payment. Most agreements include a cure period — typically 15 to 30 days — before the bank can call a formal default, so prompt disclosure to your bank is almost always the right move.

What counts as "financial indebtedness" under a typical Belgian bank agreement is broader than most borrowers expect. It covers the obvious things: new bank loans, overdraft facilities, revolving credit lines, and bonds. But it also typically extends to finance lease obligations, hire purchase agreements, recourse factoring or invoice discounting arrangements, deferred purchase price payments beyond normal trade terms, guarantees you give for someone else's debt, and other contingent liabilities such as indemnities that could require you to make a payment if a third-party obligation is not met. Belgian banks, whether KBC, BNP Paribas Fortis, ING Belgium, or Belfius, work from standard templates that tend to define this term broadly, and your starting point is that everything is restricted unless it is explicitly carved out.

Why Your Bank Requires It

From your bank's perspective, the loan they extended to you was priced on a specific view of your credit risk at a specific level of total debt. If you are allowed to quietly double your borrowings with another institution during the facility period, you are a materially different credit risk than the one they signed up for. They had no say in it. More debt means more competing claims on your cash flow if things go wrong, and it means new creditors who might one day sit alongside your existing lender in an insolvency waterfall. The additional debt restriction is also how the bank protects the leverage ratio ceiling set at origination — new borrowings raise the numerator directly, independent of earnings.

There is also a structural concern. Belgian banks often hold security over your assets: a pledge on receivables, a mortgage on property, a pledge on your business. A new lender who arrives mid-facility may want their own security. The additional debt restriction works as a pair with the negative pledge: together, they prevent a new creditor from both appearing and jumping the queue. The National Bank of Belgium's capital adequacy framework gives banks regulatory incentives to control this carefully. A borrower whose indebtedness is tightly restricted requires less regulatory capital to be held against the exposure.

What It Means in Practice

In your day-to-day operations, this covenant sits quietly until you need to act. The moment you consider any of the following, it becomes relevant: signing a financial lease for new production machinery, opening a credit line at a second bank, receiving a shareholder loan from your parent company, entering into a recourse invoice discounting arrangement, or completing an acquisition that leaves you with a deferred payment obligation to the seller.

One area that catches Belgian SMEs off guard is leasing. Under Belgian law, financial leasing, where you specify the asset, lease payments cover the full investment cost, and you have a purchase option, puts the asset on your balance sheet and creates a financial liability that almost certainly falls within your covenant's indebtedness definition. Operational renting, where the lessor retains the economic risk, has historically been treated differently and kept off-balance-sheet for covenant purposes. But if your agreement was drafted or renegotiated after IFRS 16 came into effect in 2019, check carefully: some more recent Belgian bank agreements have updated their indebtedness definitions to capture IFRS 16 right-of-use liabilities, which means even a straightforward vehicle rental fleet could be in scope.

Factoring is another grey area. If you sell receivables outright to a factor on a true-sale, non-recourse basis, that is generally an asset sale and not indebtedness. But if your factoring arrangement involves recourse to you if the debtor defaults, it is economically a secured loan and will be treated as financial indebtedness under most Belgian bank definitions.

Typical Carve-Outs and Baskets in Belgian Lending

Your agreement almost certainly does not prohibit every form of new debt absolutely. Standard carve-outs in Belgian SME loan documentation include the debt being incurred under the agreement itself, existing indebtedness that was disclosed and scheduled at signing, ordinary trade payables on normal payment terms, and working capital facilities with the same lending bank. Two further carve-outs are routinely negotiated in Belgian practice and worth asking for explicitly: non-recourse factoring on a true-sale basis, since factoring (factoringkredieten) is the most common Belgian SME working capital tool and banks regularly carve it out when the credit risk transfers fully to the factor; and new subordinated shareholder loans, where the shareholder contractually ranks behind the bank in the repayment queue by way of a formal subordination agreement. If your agreement does not already include these, they are standard negotiating points.

Beyond those standard exclusions, many agreements include a general basket: a threshold up to which you can incur additional indebtedness of any type without needing consent. For smaller SME facilities, this is typically around €100,000. For larger borrowers, it may reach €250,000 to €500,000. There is often a separate equipment leasing basket in the range of €50,000 to €250,000 per year, covering financial leases and hire purchase agreements for operational assets. Intercompany loans from a parent or affiliate are frequently permitted but subject to formal subordination, meaning the intercompany lender contractually agrees to stand behind your bank in the repayment queue.

One grey zone worth flagging is structured supplier credit. Ordinary trade payables on normal payment terms are a standard carve-out, but if a supplier or distributor provides you with a structured credit line rather than just invoice terms, that arrangement — particularly if it extends beyond 90 days — may not automatically fall within the trade payables carve-out. Confirm with your bank or legal adviser whether such financing requires its own basket or specific consent.

What to Watch

The most common breach scenario is the one you do not see coming. You sign a financial lease for a piece of equipment, it comes to the bank's attention in your annual accounts, and you discover the lease consumed your entire basket — or fell outside it entirely because no basket was included. A second risk is the second bank relationship. If you open even a small overdraft at another institution without consent, you are in breach the day the facility opens, regardless of how modestly it is drawn.

Also watch the grandfathering schedule at signing. Your agreement should list every existing financial liability, every lease, every intercompany loan, every outstanding guarantee, as permitted debt. If something was accidentally omitted from that schedule, it is technically non-permitted from day one. This is worth verifying now, regardless of when the agreement was signed.

Where You Have Room to Negotiate

The most valuable change you can make to this covenant at the term sheet stage is to add a "consent not to be unreasonably withheld, conditioned, or delayed" qualifier to the consent requirement. Belgian bank standard templates frequently omit this language, leaving the bank with absolute discretion to refuse any request with no obligation to explain why. With that qualifier in place, a refusal can be challenged. Without it, your bank can simply say no and the only recourse is a waiver negotiation from a position of weakness.

A companion ask is to pair this with a materiality threshold: below a defined amount (say €150,000) no consent is required at all, and above that amount consent cannot be unreasonably withheld. This protects your operational flexibility for routine equipment finance while preserving the bank's oversight of genuinely significant new borrowings. Both asks are standard in leveraged finance practice and are increasingly accepted in SME lending when raised at the right moment: before you sign, not six months into the facility. A breach of this covenant — even an inadvertent one — will trigger the cross-default clause in any other facility that defines events of default by reference to your other agreements.

What is a Additional debt restriction covenant?

A restriction on additional indebtedness requires lender consent before taking on new debt. This covers bank loans, bonds, credit lines, equipment leases, and sometimes vendor financing.

What does a Additional debt restriction covenant restrict?

Limits financing flexibility. Seasonal borrowing needs, equipment upgrades, or opportunistic acquisitions require advance lender approval, which may not be granted.

Can you negotiate a Additional debt restriction covenant?

Most covenant terms are negotiable at the term sheet stage, before the legal documentation is drawn up. With the Additional debt restriction 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.