Why Covenants Actually Protect You as a Borrower

There’s a narrative gaining traction in founder circles: covenants are bad. They’re restrictions. Red tape. Something to negotiate away.

We’d like to offer a different perspective. At Hum Financial, we maintain covenants in our financing documents — as an accountability lever for ourselves and our founders. Here’s why.

First, some context: the private credit market is in the middle of a land grab. With over $550 billion in dry powder waiting to be deployed, lenders are competing aggressively for deals. One of the ways they’re competing? Loosening terms. Covenant-lite structures — once reserved for the largest, most creditworthy borrowers — are now showing up in middle-market deals where they arguably don’t belong.

The proliferation of covenant-lite structures can create both borrower and lender distress in the long run: when things go sideways both parties are left with fewer tools to course-correct before a problem becomes a crisis.

So why should you, as a borrower, actually want the right covenants in your deal?

Covenants are an early warning system — for you.

A well-structured covenant isn’t a tripwire designed to punish you. It’s a guardrail that flags when your business is drifting off plan. If you’re hitting your numbers, you’ll never think about them. If something’s going wrong — a key customer churns, a product launch stalls, cash burn accelerates — a covenant breach forces a conversation with your lender before the situation deteriorates further. Without that trigger, problems compound silently.

Covenants signal that your lender did real diligence.

A lender who’s willing to fund you without covenants may not have deeply understood your business. They may be relying on portfolio diversification rather than borrower-level underwriting. That might sound fine when things are good — but when the market turns, those lenders are often the first to pull back, restructure aggressively, or sell your loan to a distressed debt buyer who has no relationship with you.

A lender who sets thoughtful covenants has taken the time to understand your financial model, your growth trajectory, and the realistic range of outcomes. That lender is more likely to be a constructive partner when you need flexibility.

Covenant-lite can actually cost you more in the long run.

Lenders who offer looser structures often compensate with higher pricing, wider spreads, or less favorable terms elsewhere in the deal (shorter maturities, tighter borrowing bases, more aggressive default triggers). The “freedom” of no covenants may come at a hidden cost that’s harder to see upfront.

The market is starting to agree.

The Octus Americas Private Credit 2026 Outlook noted an emerging trend toward looser covenants in the middle market — and explicitly cautioned against it. Ares, Carlyle, and Brookfield all emphasized that underwriting discipline is what separates winners from losers in 2026. The smart money is moving back toward structured, well-underwritten deals.

At Hum Financial, we’ve always believed that the best financing relationships are built on transparency and shared accountability. Covenants are part of that. They keep both sides honest, they create a framework for ongoing dialogue, and they ultimately lead to better outcomes for borrowers.

If you’re evaluating financing options and wondering whether covenant-lite is really better, we’d encourage you to look beyond the headline and ask: what is my lender actually committing to?

→ Ready to explore your options? Speak to Hum.