Covenants and small business lending: The Finnish case

This study examines the use and determinants of covenants in Finnish small firms' loans. The results show that 72 of the 642 loan contracts examined include at least one covenant. Negative covenants are more common than affirmative covenants in our sample. We use loan characteristics, firm characteristics, and bank relationship variables to explain the use of covenants. Our results suggest that loans with real estate collateral are less likely to contain covenants than loans with other types of collateral. Larger firms are more likely to offer covenants, while the inverse holds for manager-owned firms. Firms with high corporate leverage, a high level of investments and a high sales growth rate offer covenants more often than other firms. Bank relationship length, changes of main bank and interbank competition also affect the use of covenants.