What is an affirmative covenant in a loan agreement?

An affirmative covenant in a loan agreement refers to a specific requirement imposed on the borrower, where they must maintain certain levels of assets or engage in specific actions to ensure their financial stability. This type of covenant is designed to protect the lender's interests by ensuring that the borrower meets established performance criteria during the term of the loan.

For instance, maintaining a certain level of current assets can help the borrower demonstrate their ability to manage liquidity effectively, thereby minimizing the risk of default. This is crucial for lenders as it provides some assurance about the borrower's ongoing financial health. By including such clauses in a loan agreement, lenders can monitor their borrowers' compliance and take action if they fail to meet the stipulated conditions.

In contrast, the other options do not accurately describe the nature of an affirmative covenant. A promise to repay debt in full is more of a general obligation rather than a covenant specifying actions or behaviors the borrower must adhere to. A type of loan with no collateral refers to an unsecured loan, which is a different concept altogether. A guarantee of future profits implies a commitment to financial outcomes, which cannot be assured and therefore does not align with the concept of maintaining certain operational or financial standards typical of affirmative covenants.