Term loans impose restrictions called: A) loan boundaries

The correct answer is B) Covenants

One of the disadvantages of term loans as a source of finance is the covenants imposed on the borrowers. In order to protect their interest, the lenders generally impose restrictive conditions on the borrowers known as 'covenants'

Covenants can be of two types:

1. Affirmative loan covenants, which make the borrower perform specified activities which will help them to maintain a stable financial performance (e.g, maintaining proper books of accounts).
2. Negative loan covenants, which put restrictions around all major financial and ownership decisions made by the borrower (e.g, preventing mergers or acquisitions without proper notification to lenders).