CapEx limitation

What Is a CapEx Limitation?

A capital expenditure limitation is a negative covenant in your loan agreement that caps how much your business can spend on fixed assets in any twelve-month period. Spend above that ceiling and you are in breach. Unless you first ask your bank in writing and they say yes. The covenant is tested periodically, usually at the end of each quarter or half-year, based on your cumulative capitalised spend over the measurement period. These test dates typically align with your reporting requirement compliance certificate schedule.

What counts as CapEx under this clause is defined in the agreement itself, not by law. Belgian law does not provide a statutory definition of capital expenditure for lending purposes. Your bank will typically follow BE-GAAP accounting logic as a baseline: any expenditure you capitalise on your balance sheet as a fixed asset with a useful life beyond one year. In practice that means production machinery, vehicles, factory improvements, ICT hardware, and software you develop or buy and capitalise. Routine repairs and maintenance costs that you run through the income statement, OpEx in accounting terms, generally do not count. Neither do purchases of inventory or financial investments in other companies, which are handled by separate covenants. Note that under Belgian GAAP, formation expenses (oprichtingskosten) and capitalised R&D expenditure are also treated as intangible fixed assets on the balance sheet and therefore count toward the CapEx covenant cap in most standard definitions — a live trap for growing SMEs and early-stage companies capitalising product development.

Why Your Bank Requires It

From your bank's perspective, the loan was approved on the basis of a specific financial picture: your current revenues, your existing debt obligations, and a set of assumptions about how you will run the business over the loan term. Large capital investments change that picture. A major equipment purchase can reduce your free cash flow, increase your depreciation charge, and, if funded with additional debt, push up your leverage ratios. If you spend heavily on assets that do not immediately generate returns, your ability to service the loan — as measured by the debt service coverage ratio — may deteriorate before the investment pays off.

Belfius and ING Belgium, like their peers, build CapEx covenants into SME facility agreements as a standard part of what the market calls negative covenants: a list of things you agree not to do without lender permission. The bank is not trying to stop you from growing your business. It is trying to make sure that growth does not happen in a way that threatens your ability to repay. The covenant also gives the bank an early conversation about your investment plans before the cash has left your account, which is the point at which it still has leverage. The additional debt restriction is the sister negative covenant in the same agreement, governing new borrowings on the same basis.

What It Means in Practice

The most common structure in Belgian SME lending is a fixed euro amount per fiscal year. Your agreement might say €100,000, €250,000, or €500,000 — the number is set at loan origination based on your projected annual investment needs as outlined in the business plan you submitted to the credit committee.

If your business is capital-intensive, such as manufacturing, construction, and transport, that number can become tight faster than you expect. A Belgian metal fabricator with aging press brakes, for example, might burn through a €150,000 annual allowance on two machine overhauls, leaving nothing for a growth investment when an opportunity arises. The problem is that most Belgian SME facility agreements use a single aggregated cap with no distinction between maintenance spend and growth spend. Every euro you capitalise, whether it is replacing a broken conveyor belt or buying a brand-new laser cutter, counts against the same limit.

If you breach the cap — even unintentionally, say because a critical piece of equipment failed mid-year and had to be replaced urgently, you have technically committed a covenant breach. In Belgian banking practice, a first-time breach rarely leads to immediate acceleration of the loan. Banks generally prefer to grant a waiver or negotiate an amendment. But that process takes time, requires documentation, and typically comes with a fee and the loss of some goodwill with your relationship manager.

Typical CapEx Caps in Belgian SME Lending

Belgian banks set CapEx caps by reference to the borrower's projected annual investment in the business plan presented at credit approval. For smaller SME facilities (say, loans under €2 million), the cap is almost always an absolute euro amount. For larger or more sophisticated facilities, particularly those structured by Belfius or KBC under their structured credit products, the cap is sometimes expressed as a percentage of EBITDA, which has the useful property of growing when the business grows. Belgian practice for SME structured credit typically sits at 75–125% of prior-year EBITDA depending on sector capital intensity — a useful benchmark when evaluating whether your cap is market-standard.

The least borrower-friendly variant is a consent-based structure with no defined threshold at all, where any non-trivial CapEx above a small de minimis basket requires lender consent. This is the most restrictive approach and is more common in distressed or highly leveraged situations.

Some agreements include a carryforward provision: if you spend less than your annual allowance in year one, a portion of the unused headroom rolls over into year two. A common market structure caps the rollover at 50% of the unused prior-year amount. If your annual limit is €200,000 and you only spent €120,000, you might be able to carry forward up to €40,000 into the following year, giving you up to €240,000 in year two. These provisions are not standard: they are negotiated items, and whether your bank will agree depends on your sector, your track record, and how capital-intensive your business model is.

What to Watch

The definition of CapEx in your agreement is worth reading carefully. If you report under BE-GAAP, as most Belgian SMEs do, operating leases stay off your balance sheet and do not count as CapEx. But if your business reports under IFRS (for example, because you are a subsidiary of an IFRS-reporting group), the accounting standard IFRS 16 requires you to put most leases on your balance sheet as right-of-use assets. If your annual accounts are filed using the full Belgian model accounts (volledige jaarrekening) rather than an IFRS-format annual report, you are almost certainly on BE-GAAP. If your loan agreement defines CapEx by reference to all capitalised assets, signing a new lease — even a straightforward equipment rental, could consume your CapEx headroom without you spending a single euro on a purchase. If this applies to your situation, you need to check whether your agreement contains an explicit carve-out for IFRS 16 lease capitalisations, or whether the covenant levels were adjusted at origination to account for them.

A second thing to watch is the timing of large investments relative to your fiscal year-end. The CapEx cap resets each year, so a purchase you time in January of the next fiscal year uses next year's allowance rather than this year's. Note that the CapEx measurement date is the capitalisation date — the date the asset is recognised on the balance sheet — not the invoice or delivery date; equipment received in December but invoiced in January (or vice versa) can hit the wrong fiscal year's covenant cap if this distinction is missed. If you are approaching your annual ceiling but have a planned investment coming up, your accountant can help you decide whether delaying a few weeks to straddle the year-end is worth the operational cost.

Finally, if you received a regional investment grant from VLAIO, SPW, or hub.brussels, check whether your agreement calculates CapEx on a gross basis (total spend before the grant) or a net basis (your actual cash outlay after the subsidy). A €100,000 machine funded half by a VLAIO grant costs your business €50,000 in cash, but may count as €100,000 against your CapEx cap depending on how the covenant is drafted.

Where You Have Room to Negotiate

The most valuable negotiation in this area is asking your bank to split the CapEx cap into two separate buckets: one for maintenance CapEx and one for growth CapEx. Maintenance CapEx, the spend required to keep existing equipment running and compliant, is not optional. A Belgian food processor cannot defer a regulatory inspection or let a certified cleaning system fall into disrepair. If your maintenance spend sits inside the same cap as your growth investment, a bad year for equipment reliability can leave you with nothing left for expansion. A maintenance carve-out, defined as a fixed amount or a percentage of your annual depreciation charge, ensures that routine asset upkeep does not eat into your ability to invest in growth. This is a documented negotiating position that Belgian borrowers do raise with their banks, and lenders in capital-intensive sectors will often accept it when presented with clear data on the borrower's annual maintenance run-rate.

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.