You are reading the financial covenants section of your term sheet. One of the conditions is the Leverage ratio covenant. Here is what it measures, why the bank includes it, and what to check before you sign.
What the bank is measuring
A leverage ratio limits your total debt to a multiple of EBITDA. It is calculated as Total Debt ÷ EBITDA and tested at regular intervals.
What this means: If your EBITDA declines (e.g., due to slower revenue or rising costs), you may need to reduce debt to stay within the ratio. This can limit your ability to take on new financing for growth or working capital.
What to check
Tested quarterly or semi-annually — check the testing frequency
EBITDA definition matters: does it include add-backs, one-offs, or pro-forma adjustments?
Headroom between your current ratio and the covenant level determines flexibility
How to negotiate
Most covenant terms are negotiable at the term sheet stage, before the legal documentation is drawn up. With the Leverage ratio 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 Leverage ratio 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 Leverage ratio covenant?
A leverage ratio limits your total debt to a multiple of EBITDA. It is calculated as Total Debt ÷ EBITDA and tested at regular intervals.
What happens if you breach a Leverage ratio covenant?
If your EBITDA declines (e.g., due to slower revenue or rising costs), you may need to reduce debt to stay within the ratio. This can limit your ability to take on new financing for growth or working capital.
Can you negotiate a Leverage ratio covenant?
Most covenant terms are negotiable at the term sheet stage, before the legal documentation is drawn up. With the Leverage ratio 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.