Liquidity covenant
What is a liquidity covenant, and when do lenders use one instead of a leverage test?
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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
A liquidity covenant requires a borrower to hold at least a set amount of cash, or of cash plus undrawn committed facilities, tested monthly or even weekly. Lenders use it where earnings-based covenants would say little: a business growing at a loss, a company in a turnaround, a project before it earns. It measures the thing that ends a business soonest, running out of money, and a breach tends to give the lender warning while there is still something to talk about.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
// WORKED IN
// NEXT TO IT
- Covenant headroom
- Negative pledge
- Condition precedent (CP)
- Event of default
- Covenant waiver
- Reservation of rights
- Term sheet
- Condition subsequent
- Review event
- Repayable on demand
- Material adverse change (MAC) clause
- Cross-default
- Change of control clause
- Cure period
- Compliance certificate
- Information undertakings
- Equity cure
- Springing covenant
- Covenant reset
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