A missed covenant does not automatically end an acquisition loan. But the loan agreement, not the business’s good intentions, decides what happens next — and a secured lender’s own notice obligations before enforcing are set by federal statute, not negotiated away.
Key takeaways
A covenant breach after closing is a moment where the lender’s discretion, not automatic legal consequence, usually decides what happens. Understanding the actual sequence — and the one hard statutory deadline inside it — is the difference between a borrower who negotiates from a position of knowledge and one who reacts to whatever the lender proposes.
Treadstone Law’s own guide to acquisition-loan covenants lays out the procedural steps plainly. First, “the breach is identified — either by the borrower’s own reporting or by the lender’s review of financial statements.” Second, “the loan agreement typically defines the breach as an event of default, whether or not the business is otherwise current on its payments” — meaning a borrower current on every payment can still be in default purely on the covenant. Third, “the lender decides how to respond,” and critically, “lenders don’t always accelerate a loan or call it immediately on a technical breach — many will discuss a waiver or amendment, particularly for a borrower with an otherwise good track record.” (treadstonelaw.ca, loan covenants on business acquisition financing) That third step is where most real-world covenant breaches actually resolve — not in court, but in a negotiated conversation.
The same source describes the waiver step directly: “a waiver may be negotiated, where the lender formally agrees not to enforce its rights arising from that specific breach, sometimes in exchange for a fee, tighter terms, or additional reporting going forward.” (treadstonelaw.ca) A waiver is a documented, one-time release tied to a specific breach — it is not the same as amending the covenant itself going forward, and a borrower should not assume one waiver sets a precedent protecting against the same breach recurring next quarter. If the same covenant is likely to be tripped again — a seasonal pattern, for instance — the more durable fix is renegotiating the covenant’s terms, not collecting repeated one-off waivers.
Where a waiver is not offered or not accepted, treadstonelaw’s guide states the lender “may exercise its default remedies, which can include demanding repayment of the full loan, enforcing security, or other remedies set out in the loan agreement.” (treadstonelaw.ca) But enforcement against a secured position is not instantaneous even at this stage. Where the borrower is insolvent and the lender intends to enforce against “all or substantially all” of the inventory, accounts receivable or other property, the Bankruptcy and Insolvency Act requires the secured creditor to “send… a notice of that intention” and imposes a hard floor: the creditor “shall not enforce the security… until the expiry of ten days after sending that notice,” unless the insolvent person consents — and that consent “may not be obtained… prior to the sending of the notice.” (BIA, s. 244(1)–(2.1)) That ten-day floor is a statutory minimum, not a negotiable term inside the loan agreement, and it applies specifically to enforcement against substantially all of the named collateral categories on an insolvent borrower — a distinct scenario from a lender simply calling a loan on a solvent business that has merely tripped a ratio.
A covenant breach is usually the debt-service coverage ratio itself falling below the negotiated floor — deavo’s published targets run roughly 1.25× on SDE to 1.30× on EBITDA (deavo.ai/financing) — which means the same coverage math that determined the loan size at closing is what determines whether a bad quarter becomes a technical default. A borrower who tracks that ratio internally throughout the year, rather than discovering the breach only when the lender’s own quarterly review flags it, is in a far stronger position to approach the lender proactively with a waiver request before the lender decides unilaterally how to respond.
A business carrying a $1,900,000 acquisition loan with a 1.30× EBITDA covenant sees earnings dip after losing a mid-sized customer, dropping coverage to 1.18× for one quarter — a clear technical breach. The borrower identifies the shortfall from its own internal reporting before the lender’s quarterly review is even due, and approaches the lender proactively with a plan: a new customer contract signed the following month is projected to restore coverage above 1.30× within two quarters. The lender agrees to a formal waiver for the single quarter in breach, in exchange for monthly rather than quarterly reporting for the next year and a modest waiver fee. Because the business was neither insolvent nor facing enforcement against its collateral, the BIA’s ten-day notice requirement never comes into play here — the entire episode resolves through the negotiated waiver process, not through security enforcement.
Related: covenant packages on an acquisition loan, the glossary entry on financial covenants, and buying assets out of a Canadian insolvency.
No. Treadstonelaw’s own description is that lenders “don’t always accelerate a loan or call it immediately on a technical breach” — a waiver or amendment is the more common first response, particularly for a borrower with an otherwise good payment history.
Where the borrower is insolvent and the lender intends to enforce against substantially all of its inventory, receivables or other property, the Bankruptcy and Insolvency Act requires at least ten days’ written notice before enforcement, and that period cannot be waived by consent given before the notice is sent.
Yes — a waiver addressing the specific breach, sometimes paired with tighter reporting or amended terms, is the typical resolution described by treadstonelaw’s own guide, well short of a full refinancing or loan payout.
No — it applies specifically where the borrower is insolvent and the secured creditor intends to enforce against substantially all of the inventory, accounts receivable or other named property. A solvent business negotiating a waiver for an ordinary technical breach is a different scenario, governed by the loan agreement itself rather than that statutory notice period.
A short call is enough to map a waiver request against what the loan agreement actually requires.
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