You are reading the undertakings section of your term sheet. One of the conditions is the Dividend restriction covenant. Here is what it controls, why the bank includes it, and what to check before you sign.
What the bank is measuring
A dividend restriction limits or prohibits distributing profits to shareholders during the loan term. Conditions for permitted dividends (if any) are typically specified.
What this means: Cash generated by the business is retained for debt service rather than distributed to owners. This affects owner returns and may limit the ability to fund personal obligations or other ventures.
What to check
Permitted distributions: some allow dividends up to a percentage of net income or after meeting leverage tests
Tax distributions: restrictions may carve out tax-related distributions to shareholders
Management fees to related parties may also be restricted under the same clause
How to negotiate
Most covenant terms are negotiable at the term sheet stage, before the legal documentation is drawn up. With the Dividend 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.
What to do next
The fastest way to see whether a Dividend restriction 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 Dividend restriction covenant?
A dividend restriction limits or prohibits distributing profits to shareholders during the loan term. Conditions for permitted dividends (if any) are typically specified.
What does a Dividend restriction covenant restrict?
Cash generated by the business is retained for debt service rather than distributed to owners. This affects owner returns and may limit the ability to fund personal obligations or other ventures.
Can you negotiate a Dividend restriction covenant?
Most covenant terms are negotiable at the term sheet stage, before the legal documentation is drawn up. With the Dividend 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.