Cross-default

Cross-default: A clause making you in default on this loan because you defaulted on a different one — often with an entirely different lender. One stumble becomes simultaneous defaults across every facility carrying the clause.

Why it matters

Cross-default converts a contained problem into a systemic one. Miss payments on an equipment loan and, with cross-default clauses in place, your line of credit can be frozen and your term loan accelerated at the same time — even though both were perfectly current.

This is how businesses fail quickly rather than slowly. The original problem might have been survivable; three simultaneous defaults generally are not.

Where you will meet it

Common in bank loan agreements, particularly where one bank holds several of your facilities, and in SBA loan documents. Also frequent where a lender wants protection against deterioration it would otherwise learn about late.

Related and worth knowing: cross-collateralization, where collateral securing one loan also secures another. Different mechanism, same concentrating effect.

What to look for in the document

• Scope. Does it trigger on default with any creditor, or only with this lender? Any-creditor versions are far more dangerous.
• Threshold. Is there a dollar floor, so a disputed $800 invoice cannot trigger it? Ask for one.
• Cure period. Do you get time to fix the underlying default first?
• Does it include non-monetary default? Breaching a covenant on another loan triggering default here is a wide net.
• Does it cover affiliates? A problem at a related entity reaching this loan is worth knowing about in advance.

What to ask before you sign

• Does this agreement contain a cross-default clause, and what exactly triggers it?
• Will you add a dollar threshold and a cure period?
• Can it be limited to defaults with this institution only?
• Does it extend to my affiliates or to me personally?