How Do You Negotiate Covenant Changes Without Triggering Lender Defensiveness?

Covenants exist for a reason: they protect lenders from unexpected degradation in portfolio quality, capital structure, or liquidity. But early-stage facilities often contain covenants that reflect a lender’s fear — not the actual risk of the portfolio.

As the business matures, founders naturally want those covenants relaxed.

That’s smart. But the how matters.

Here’s a practical framework that keeps lenders collaborative instead of defensive.

1. Start With a Partnership Frame, Not a Critique

If the opening line is “this covenant doesn’t work anymore,” the lender hears:

• you mispriced risk

• you don’t understand our business

• we need you to give something up

A better opening:

“We’ve de-risked significantly since the facility was structured. We’d like to adjust covenants to better reflect the reality of the business — and to set the foundation for a long-term partnership.”

Lenders respond to alignment, not pressure.

2. Show De-Risking as a Multi-Dimensional Story

Your argument should be cumulative:

• improved losses

• stronger servicing

• cleaner reporting

• consistent compliance

• operational maturity

• product-market fit

• improved capital position

No single factor wins the argument.

Together, they create the “de-risking layer cake” lenders can trust.

3. Quantify Why the Existing Covenant Is Too Tight (or Illogical)

Example: A tangible net worth covenant that suppresses effective advance rate.

Don’t say “this is punitive.”

Say:

• “The covenant was calibrated when our business had no track record.”

• “Here’s how our actual performance compares to original assumptions.”

• “Here’s how much cushion exists even under stress scenarios.”

• “Here’s why a revised covenant still protects you fully.”

You’re not asking for relief — you’re asking for alignment to actual risk.

4. Give Them Something They Can Take to Investment Committee

Lenders rarely push covenant adjustments without airtight justification.

Give them:

• charts showing stress cases

• evidence of portfolio stability

• comparisons to similar facilities

• updated leverage and capital structure

• clear rationale for each change

Do their job for them — and they become your advocate.

5. Tie Requests to Long-Term Relationship Value

The magic sentence:

“We want you as a long-term partner — but the current covenant structure will eventually push us to diversify.”

This reframes the ask as a win-win.

The Takeaway

Negotiating covenants isn’t about force; it’s about framing.

Show that the business has matured, that the lender is protected, and that a more reasonable covenant structure creates long-term partnership value.

That’s how you get movement — even on terms lenders don’t normally touch.