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Portfolio covenants

Portfolio covenants define what collateral can go into your pool and how that pool must look at all times. These aren’t abstract credit tests—they directly affect your borrowing base, your ability to fund new originations, and your flexibility to adjust your business strategy. A single portfolio covenant breach can trap cash, reduce your advance rate, or force you to buy back assets.

From the capital provider’s perspective, portfolio covenants ensure the collateral pool matches what they underwrote. From your perspective, they’re the constraints you’ll live with daily throughout the facility life.

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Types of portfolio covenants

Portfolio covenants fall into three categories: eligibility criteria, concentration limits, and weighted average tests.

Eligibility criteria

Eligibility criteria determine whether an individual asset can be included in the borrowing base. They’re binary—an asset either passes all criteria or it’s ineligible.

Common eligibility criteria by asset class:

Asset Class	Key Eligibility Criteria
Consumer unsecured	FICO ≥ 620-660, original term ≤ 48-60 months, principal $2,500-$35,000, not delinquent
Auto loans	LTV ≤ 120%, FICO ≥ 580-640, vehicle age ≤ 7 years, original term ≤ 72-84 months
Equipment	Obligor in business ≥ 2 years, equipment not titled in obligor name issues, original term ≤ 60-84 months
Bridge / fix-flip	LTV ≤ 65-75%, DSCR ≥ 1.0-1.2x, loan term ≤ 12-24 months, property type allowed
Trade receivables	Invoice age ≤ 90 days, obligor not in bankruptcy, no disputes, concentration within limits

What the language looks like:

No Receivable shall be an Eligible Receivable unless, as of the related Cut-Off Date:
  (i) the Obligor has a minimum FICO score of 620;
  (ii) the original term does not exceed 60 months;
  (iii) the Outstanding Principal Balance is not less than $2,500 or greater than $35,000;
  (iv) the Receivable is not more than 30 days Delinquent;
  (v) the Receivable is denominated and payable in US Dollars...

Eligibility criteria are typically found in Exhibit A or Schedule I to the credit agreement, or in the Definitions section under “Eligible Receivable” or “Eligible Asset.”

Concentration limits

Concentration limits cap exposure to any single risk factor. They prevent portfolio deterioration through excessive clustering.

Typical concentration limits:

Concentration Type	Consumer	Auto	Equipment	Real Estate
Single obligor	1-2%	0.5-1%	2-5%	5-10%
Single state	20-25%	15-20%	25-30%	20-30%
Single industry	N/A	N/A	15-25%	N/A
Delinquent assets (30+)	6-10%	4-8%	5-10%	5-10%
Modified loans	5-10%	3-7%	5-10%	5-10%
Original term bucket	Varies	20-30% >72mo	Varies	N/A

Geographic concentrations require special attention. California, Texas, and Florida dominate many consumer and small business origination portfolios. Capital providers often allow higher limits for these states (25-35%) but they’ll still trip up originators who source heavily from a single market.

Weighted average tests

Weighted average tests ensure the portfolio maintains minimum quality metrics on a blended basis. Individual assets can be below the threshold as long as the weighted average stays above.

Common weighted average tests:

Test	Consumer	Auto	Equipment	What Trips It
WA FICO floor	640-680	620-660	N/A	Mix shift to near-prime
WA coupon floor	12-18%	8-14%	6-12%	Promotional rates, rate environment
WA remaining term cap	36-48 months	48-60 months	48-60 months	Originating longer product
WA LTV cap	N/A	85-100%	N/A	Higher advance originations
WA seasoning floor	1-3 months	3-6 months	3-6 months	High-velocity new originations

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How to negotiate portfolio covenants

Run your data first

Before agreeing to any portfolio covenant level, run your last 12 months of origination data against each proposed test. Calculate:

1. Current position: Where does your existing portfolio sit against each test?
2. Headroom: How much buffer exists between current position and covenant level?
3. Historical range: What’s your worst position in the last 24 months?
4. Forward projection: Where will you be if you execute on current business strategy?

Target headroom by covenant type:

Covenant Type	Minimum Headroom	Preferred Headroom
Single obligor concentration	0.5%	1%
Geographic concentration	4-6%	8-10%
Delinquency limit	2-3% above historical peak	4-5% above peak
WA FICO floor	10-15 points	20-25 points
WA coupon floor	100-150 bps	200+ bps

Eligibility criteria negotiation

Eligibility criteria set the outer bounds of what you can originate. Negotiate for criteria that match your target credit box plus room for strategic evolution.

Key negotiations:

Criterion	What Capital Providers Propose	What to Push For
FICO floor	640-660	620 if you’re considering near-prime expansion
Max loan size	$25,000-$35,000	Match your largest product offering plus 10%
Max term	48-60 months	Longest product term you currently or may offer
Geographic restrictions	Exclude certain states	Push back on exclusions in your target markets
Delinquency cutoff	Current (0 DPD)	30 DPD allows recently cured loans

Eligibility criteria are easier to negotiate at term sheet than to amend later. Every expansion requires lender approval, legal fees, and often credit committee reapproval. Get the criteria right upfront.

Concentration limit negotiation

Concentration limits are where your origination strategy meets lender risk appetite. The negotiation often comes down to data.

Negotiation approach:

1. Present historical data: Show your actual concentration ranges over 24+ months
2. Explain business drivers: Why are you concentrated where you are?
3. Propose tiered limits: Higher limits for top 3 states, standard limits for others
4. Offer enhanced reporting: More frequent concentration reports in exchange for higher limits

Worked example—state concentration:

Your current California concentration is 28%. Capital provider proposes 25% limit.

Approach	Outcome
Accept 25%	You must dilute CA or exclude CA loans—immediate operational impact
Push for 30%	Matches current with minimal headroom—will trip on normal variance
Push for 33%	Provides 5% headroom—manageable with monitoring
Propose tiered	33% for top 3 states (CA, TX, FL), 25% for others—targets the real issue

Weighted average test negotiation

Weighted average tests give you more flexibility than individual eligibility criteria because they allow for portfolio mixing. But they can be harder to cure once breached.

Negotiation strategies:

Test	Negotiation Angle
WA FICO	Use median FICO instead of average to reduce outlier sensitivity
WA coupon	Exclude promotional or introductory rates from calculation
WA term	Use remaining term (declining) rather than original term (static)
WA seasoning	Allow zero-seasoning up to X% of pool for fresh originations

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Monitoring and compliance

Build tracking before you need it

Your compliance tracking system should:

1. Calculate daily: Portfolio covenants affect borrowing base continuously
2. Forecast: Project covenant positions based on origination pipeline
3. Alert early: Trigger warnings at 80% of limit, not 100%
4. Track velocity: Show how quickly you’re approaching limits

What breaches look like operationally

Covenant Type	How Breach Occurs	Warning Signs
Single obligor	Large payment or prepayment from other obligors shifts concentration	Pool shrinkage without pro-rata reduction
State concentration	Geographic strategy change or seasonal origination patterns	Rising concentration in monthly reports
Delinquency limit	Credit deterioration or vintage performance issues	30-day roll rates increasing
WA FICO	Near-prime expansion or vintage mix shift	Monthly origination FICO trending down
WA coupon	Competitive pricing pressure or rate cuts	Spread compression in new production

Cure mechanics

Portfolio covenant cures typically require portfolio adjustment rather than cash injection.

Common cure methods:

Method	How It Works	Timeline
Origination dilution	Add compliant assets to shift averages	15-30 days depending on origination velocity
Asset sale	Remove non-compliant or high-concentration assets	10-20 days to execute sale
Exclusion	Remove assets from borrowing base (still own them)	Same day—but reduces borrowing capacity
Substitution	Swap non-compliant for compliant assets	10-15 days if you have inventory

Portfolio covenant cure periods are typically shorter than financial covenant cure periods—often 10-15 business days rather than 30 days. Know your cure timeline before you need it.

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Asset-class-specific benchmarks

Consumer unsecured

Covenant	Typical Range	Aggressive	Conservative
WA FICO floor	660-680	640	700
Max single state	25-30%	35%	20%
Max 30+ DQ	8-12%	15%	6%
Max original term	48-60 months	72 months	48 months
Max loan size	$25-35K	$50K	$20K

Auto loans

Covenant	Typical Range	Subprime	Prime
WA FICO floor	620-660	580	680
Max LTV	115-125%	130%	100%
Max vehicle age	7-10 years	12 years	5 years
Max single state	15-20%	25%	15%
Max 30+ DQ	5-8%	10%	4%

Equipment finance

Covenant	Typical Range	Aggressive	Conservative
Max single obligor	3-5%	7%	2%
Max single industry	15-25%	30%	15%
Max 30+ DQ	5-8%	10%	5%
Max original term	60-84 months	84 months	60 months
Min obligor years in business	2 years	1 year	3 years

Real estate bridge

Covenant	Typical Range	Aggressive	Conservative
Max LTV	70-75%	80%	65%
Max single property	7-10%	15%	5%
Max single state	25-35%	40%	20%
Max 30+ DQ	5-8%	10%	5%
Max term	18-24 months	36 months	18 months

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Common pitfalls

Setting limits at current levels. If your CA concentration is currently 24% and you agree to a 25% limit, you have no headroom. Normal variance in origination patterns will trip the covenant. Insist on limits that accommodate your historical range plus a buffer.

Ignoring the interaction between tests. A delinquency spike affects both your concentration limit (more assets become 30+ DQ) and your weighted average tests (if delinquent loans are lower FICO). Model how one stress affects multiple covenants simultaneously.

Not understanding the exclusion mechanics. When you exclude an asset from the borrowing base to cure a concentration limit, you still own that asset but can’t borrow against it. Your effective advance rate drops. A $75M facility with $10M in excluded assets is really a $65M facility.

Treating eligibility criteria as static. Your business will evolve. The credit box that made sense at closing may be constraining in 18 months. Build in flexibility at term sheet—expanding eligibility criteria after closing is expensive and time-consuming.

Underestimating seasonal patterns. Many businesses have geographic or credit quality seasonality. Tax season originations may skew FICO differently than Q4. Run your covenant analysis by quarter, not just annual averages.

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Related topics

• Covenants overview — the five covenant categories and how they interact
• Financial covenants — originator-level balance sheet and income tests
• Borrowing base mechanics — how eligibility criteria affect your available funding
• Triggers, tests, and performance events — how portfolio covenant breaches flow to triggers