Unrestricted-Cash Covenant

A debt agreement clause requiring a borrower to maintain a minimum amount of cash that is free from any liens or restrictions.

An unrestricted-cash covenant is a legally binding clause in a debt agreement that requires the borrowing company to maintain a specified minimum balance of cash and cash equivalents at all times. Crucially, this cash must be "unrestricted," meaning it is not pledged as collateral for other loans, is free from any liens, and is immediately available to meet operational needs or repay the lender. Lenders use this covenant as a protective buffer to ensure a borrower maintains baseline liquidity. For early-stage, pre-profit, or high-burn-rate companies, this covenant is a critical risk factor. If a company's cash burn rate is too high or its revenues underperform, it may breach this minimum threshold even if it has not missed a scheduled interest payment. Investors must monitor these thresholds closely because a covenant breach constitutes a technical default. A default gives the lender the right to accelerate the debt, demand immediate repayment, seize collateral, or force the company into a highly dilutive emergency equity raise or restructuring.

Company A has an outstanding loan of $50,000,000 with a covenant requiring it to maintain unrestricted cash equal to at least 15% of the debt balance. The minimum required cash is $50,000,000 0.15 = $7,500,000. If Company A's unrestricted cash balance falls to $7,200,000, it breaches the covenant and enters technical default.