Minimum EBITDA

What Is a Minimum EBITDA Covenant?

EBITDA (earnings before interest, taxes, depreciation, and amortisation) strips out financing and accounting decisions to show how much cash a business generates from its operations. A minimum EBITDA covenant sets a contractual floor below which that figure cannot fall, measured at regular intervals. Fall below it and you are technically in default, regardless of whether you have missed a single repayment.

One detail that catches borrowers out: EBITDA is not a term defined in BE-GAAP or standard accounting. It is defined in your loan agreement, and that definition controls exactly what gets included or excluded. Your accountant's P&L EBITDA and your covenant EBITDA can differ — and when they differ, the loan agreement wins.

The floor is fixed at origination, derived from the business plan you submitted to the bank. It is tested on a trailing twelve-month (LTM) basis: the bank looks at the most recent twelve months of earnings at each test date, typically quarterly or semi-annually. One bad quarter does not disappear after three months. It stays in the calculation for a full year, dragging the trailing figure down across four consecutive test dates.

Why Your Bank Requires It

The minimum EBITDA covenant is the clearest signal the bank has that the business underpinning your loan is still functioning as modelled. When your credit was approved, the bank built a repayment model on the assumption that you would generate a certain level of earnings. The floor is the point at which that assumption breaks down.

Ratio-based covenants, such as Net Debt divided by EBITDA, tell the bank how leveraged you are. The EBITDA floor tells the bank something more fundamental: that the business can still service its debt at all. It is a floor on viability, not just on leverage. Facilities that combine a minimum EBITDA floor with a debt service coverage ratio covenant are testing the same earnings from two angles: the floor sets the absolute minimum; the DSCR tests whether those earnings cover the full repayment schedule.

The Double Breach Problem

Here is what most borrowers do not realise until it is too late. If your loan includes both a minimum EBITDA floor and a leverage ratio covenant, common in Belgian SME lending, a single deterioration in earnings can trigger two simultaneous breaches at the same test date.

The mechanics are straightforward but painful. Suppose your Net Debt is €2.1 million and your EBITDA falls from €600,000 to €480,000. First, if the floor was set at €500,000, you have breached it directly. Second, your leverage ratio has moved from 3.5x to 4.4x, which may independently breach its own maximum. The EBITDA figure is the denominator in your leverage calculation. When it falls, the ratio inflates automatically. One bad year, two covenant breaches, at the same test date, each carrying cross-default risk into all your other facilities.

Typical Floors in Belgian SME Lending

The most common approach in Belgian SME lending is to express the floor as a percentage of projected EBITDA from your business plan, typically between 65% and 75% of your base-case figure. If you projected €600,000 EBITDA and the bank set the floor at 75% of that, you are committed to maintaining at least €450,000 — permanently. A bad quarter cannot fix that.

Market practice calls for a cushion of 25% to 35% below the base-case projection; below 25% is considered tight. Some Belgian banks, particularly for smaller transactions, set an absolute euro figure instead: "minimum EBITDA of €500,000 per trailing twelve-month (LTM) period." These are structurally different covenant types. A percentage-of-plan floor is anchored to your original business case, which means renegotiating it typically requires revisiting your approved projections; an absolute floor is a fixed number, which can sometimes be adjusted without reopening the full credit file. Knowing which structure you have matters before you enter a waiver conversation. What matters immediately is the gap between where your EBITDA is heading and where the floor sits.

Which Belgian Businesses Are Most at Risk

HORECA, non-food retail, and construction face the highest minimum EBITDA covenant risk among Belgian SMEs because their earnings are structurally volatile in ways trailing twelve-month testing does not absorb well. A bad summer season for a restaurant stays in the calculation through four subsequent test dates. A weak post-holiday Q1 for a non-food retailer, combined with margin compression from interest costs that have more than doubled since 2022, can push an otherwise healthy business into breach territory. Construction SMEs face lumpy revenue recognition tied to project completion, creating timing mismatches with quarterly tests that say nothing about the underlying health of the business. For these sectors, the minimum EBITDA covenant is not a distant safeguard. It is an active operational constraint.

Where You Have Room to Negotiate

The most practical lever, both at origination and in a waiver conversation, is EBITDA add-backs: specific costs excluded from the covenant calculation because they are deemed non-recurring. Belgian banks will generally accept one-off restructuring costs such as severance from a reorganisation, genuine extraordinary losses such as a litigation settlement or a one-time relocation expense, and major non-cash charges. The harder negotiation involves costs in a grey zone: management fees paid to a holding company, provisions for bad debts, or start-up costs for a new location. For owner-managed Belgian SMEs, owner compensation adjustments are among the most frequently negotiated add-backs with KBC and BNP Paribas Fortis — if an owner has taken an unusually low or unusually high salary relative to market, both directions can be arguable, and this should be raised explicitly at origination rather than left to a waiver conversation.

The test the bank applies is whether the cost is genuinely non-recurring. If the same category appeared in prior periods, it is not non-recurring. The bank will know, because it has your accounts. The strongest position is to negotiate an explicit add-back list at origination rather than a general "extraordinary items" carve-out that requires case-by-case argument at each test date. A pre-agreed list also creates a structural benefit: because your minimum EBITDA floor and your leverage ratio use the same EBITDA definition, an accepted add-back improves both calculations at once. One ceiling to know going in: European lending practice caps total add-backs at around 25% of EBITDA. That is the realistic limit of what the mechanism can deliver. If your facility also includes an interest coverage ratio test, the same add-backs lift all three EBITDA-based calculations simultaneously.

What is a Minimum EBITDA covenant?

A minimum EBITDA covenant sets a floor on earnings (EBITDA) that must be maintained, typically tested quarterly on a trailing twelve-month basis.

What happens if you breach a Minimum EBITDA covenant?

Revenue shortfalls or cost overruns that push EBITDA below the floor trigger breach risk. This limits your ability to absorb temporary margin compression or invest heavily in growth.

Can you negotiate a Minimum EBITDA covenant?

Most covenant terms are negotiable at the term sheet stage, before the legal documentation is drawn up. With the Minimum EBITDA 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.