A cross-default clause makes a default under another agreement an event of default under this one. If your bank loan has one, a missed payment on an equipment note, a breached seller note or a defaulted lease above the clause's dollar threshold also puts the bank loan in default, even while the bank is paid on time. Some clauses are triggered by any default on other debt; narrower ones, called cross-acceleration, only when the other creditor actually demands repayment. Before refinancing or restructuring any one obligation, map which agreements cross-default into which.
- What it does
- Makes a default on other debt a default on this loan
- Threshold
- Usually applies only to other debt above a stated amount
- Broad form
- Any default on other debt, even one that has not been enforced
- Narrow form
- Cross-acceleration: only when the other creditor accelerates
- Why it matters
- One creditor's problem becomes every creditor's problem
How the clause works
A lender cares about the borrower's other debts because a borrower that is defaulting elsewhere is likely to be in trouble, and because the other creditor may start enforcing against the same cash and assets. Without a cross-default clause, a bank could watch an equipment lender repossess machinery and sue for the balance while its own loan stays technically current. The clause lets the bank act at the same time as the other creditor, not after.
The clause sits in the events of default section of the loan agreement. A typical version says it is an event of default if the borrower or any guarantor fails to pay any other indebtedness above a stated amount when due, or if any other event occurs under an agreement governing that indebtedness that would allow the holder to accelerate it. Three pieces of that sentence decide how dangerous it is: which debt it reaches, how large the threshold is, and whether it is triggered by a default or by an acceleration.
Cross-default vs cross-acceleration
| Cross-default | Cross-acceleration | |
|---|---|---|
| Triggered when | A default exists on the other debt that would let its holder accelerate | The other creditor actually accelerates, or the debt is not paid at maturity |
| Covers covenant breaches elsewhere | Yes, even if the other lender has waived nothing and done nothing | Only once that lender acts on them |
| Effect on a quiet waiver | A waiver from the other lender may cure it, depending on the wording | Nothing to cure unless the other lender acts |
| Who prefers it | Lenders, especially banks and smaller-loan documents | Borrowers; more common in negotiated credit agreements |
The broad form is the more common in smaller business loans. Under it, a missed coverage covenant in an equipment financing agreement is enough to put the bank loan in default, even if the equipment lender has no interest in acting on it. Cross-acceleration waits until the other creditor has done something, which gives the borrower time to get a waiver from that creditor before the problem spreads. Asking for cross-acceleration instead of cross-default is one of the most useful changes a borrower with several lenders can make, and one that larger borrowers frequently get.
Thresholds: which defaults are big enough to count
Most negotiated clauses apply only to other debt above a threshold, stated as a dollar amount, so that a disputed invoice or a small vehicle loan does not put the main loan at risk. There is no standard figure. Lenders set it by the size of the business and the loan, and borrowers argue it upward. A clause with no threshold, which some bank and SBA documents have, reaches every obligation the business owes.
How the threshold is measured matters as much as its size. Is it the amount in default, or the total principal of the debt in default? Is it per agreement, or all defaulted debt added together? In plain numbers, with a threshold of 250:
- If the test is the total principal of the defaulted debt, a missed payment of 20 on an equipment loan with 400 outstanding triggers the clause.
- If the test is the amount past due, the same missed payment does not.
- If defaulted debts are added together, two small equipment loans of 150 each, both in default, trigger it; measured one at a time, neither does.
Read the definition of indebtedness alongside the threshold. It is often wider than borrowers expect.
What counts as other debt
The clause reaches whatever the agreement defines as indebtedness, and that definition usually goes well beyond bank loans. Depending on the wording, it can include:
- Equipment loans and finance leases. Almost always included. Operating leases sometimes are.
- Seller notes. A seller note from an acquisition is debt, and a missed payment on it can trigger the senior loan, unless the subordination agreement says otherwise. SBA seller notes on full standby take no payments, so there is nothing to miss.
- Guarantees. A guarantee by the business of an affiliate's loan, such as the real estate entity's mortgage in a propco/opco structure, is indebtedness. A default at the property company can become a default at the operating company.
- Hedges. An interest rate swap is usually covered, often with its own threshold.
- Merchant cash advances. Advances are structured as purchases of receivables rather than loans, but many definitions are broad enough to reach them, and lenders treat them as debt regardless. See refinancing cash advances into term debt.
- Guarantor debt. Some clauses reach the guarantors' own debts, so an owner's personal default on an unrelated loan can reach the business's loan.
Cross-default also appears outside loan agreements. Equipment leases often default if the lessee defaults with any affiliate of the lessor. Franchise agreements and real estate leases sometimes include defaults on other agreements with the same counterparty. The standard SBA note treats a default on another creditor's loan or agreement as a default where the lender believes it may materially affect the borrower's ability to repay, which is broad and turns on the lender's judgment.
Map the links before you refinance any one loan
An owner with several lenders who wants to refinance, restructure or renegotiate one of them should first build a map: every agreement, its cross-default clause, its threshold, and which other agreements it points to. The starting point is a business debt schedule with a column added for cross-default terms.
| Obligation | Cross-default? | Reaches | Threshold | Consequence of a problem here |
|---|---|---|---|---|
| Bank term loan | Yes, broad form | All indebtedness of borrower and guarantors | Stated amount, total principal | Default here reaches the equipment loans through their own clauses |
| Equipment loan A | Yes | Any agreement with the lessor or its affiliates | None | A missed payment here triggers the bank loan if above its threshold |
| Seller note | Yes, but payments blocked while senior loan in default | Senior loan only | None | Default here triggers the bank loan unless the subordination agreement limits it |
| Merchant cash advance | Yes, through anti-stacking and default terms | Any new financing and any other default | None | Reaches the bank loan if its indebtedness definition covers advances |
The map answers the questions that matter. Paying off one lender in full does not trigger anyone else's clause, and is usually the cleanest move, though check first that the other agreements allow the prepayment: senior lenders often restrict paying off a seller note or other junior debt early. Skipping a payment to one lender to free cash for another almost always does. Asking one lender for a forbearance may concede a default that others can then act on. Taking out a new advance to cover a shortfall can breach both the new debt limits in the negative covenants and the anti-stacking clauses in existing advances.
Never negotiate with one creditor in isolation. The other agreements are listening, and most of them do not need notice to act.
For the step-by-step view of how a single default travels through a borrower's debts and why piecemeal fixes fail, see cross-default clauses when you have several loans. For consolidating several obligations into one, see business debt consolidation.
Negotiating the clause in a new loan
When you are taking on new debt, the points to raise are: cross-acceleration rather than cross-default; a threshold sized to the business, measured per agreement and by the amount in default; an indebtedness definition that leaves out trade payables and operating leases; no reach into the guarantors' personal debts; and a provision that a waiver by the other creditor also cures the default here. Transparent's lender package includes the full debt schedule and the UCC position, so every lender quoting sees the existing obligations and can size its own clause accordingly rather than defaulting to the broadest form.
Common questions
- What is a cross-default clause in simple terms?
- A promise that if you default on one of your other debts, you are also in default on this one. It lets a lender act as soon as another creditor can.
- What is the difference between cross-default and cross-acceleration?
- Cross-default is triggered by a default on other debt, even one no one has acted on. Cross-acceleration is triggered only when the other creditor actually accelerates. Borrowers prefer cross-acceleration.
- Does a cross-default clause cover my seller note?
- Usually, since a seller note is debt. The subordination agreement between the seller and the senior lender may limit what happens if it is missed.
- Does paying off one loan early trigger cross-default on the others?
- No. Paying a debt in full is not a default. Check first that your other agreements allow the prepayment, since a senior lender often restricts paying off junior debt such as a seller note early. Missing payments, breaching covenants or negotiating a forbearance with one creditor can trigger it.
- Can my personal debts trigger a default on my business loan?
- They can if the clause reaches the guarantors' indebtedness. Check whether it does before signing, and ask to limit it to the borrower and its subsidiaries.