Written byCross-default is a loan clause that puts you in default on one facility as soon as you default on another finance agreement.
Also known as: cross default clause
Key points
- It links otherwise separate contracts, so one broken covenant can make several lenders' debts payable at once.
- The clause usually sits in the general terms of a facility letter, not in the pricing schedule.
- Broad drafting can catch equipment leases, hire purchase and related company debts, not just bank loans.
- Borrowers commonly negotiate a minimum amount and a cure period so small disputes do not set it off.
How a cross-default clause works
Every loan contract lists events of default: missed payments, broken covenants, insolvency and so on. A cross-default clause adds one more. If you default under any other finance agreement, that counts as a default under this one too, even though this facility is fully up to date.
Once it is triggered, the lender can use its normal remedies. It can stop further drawdowns, demand repayment of the whole balance, or enforce its security. Broad drafting bites as soon as another financier becomes entitled to demand early repayment, whether or not it does. A narrower version, cross-acceleration, triggers only once the other financier actually calls the debt in, which is what borrowers usually ask for.
Why lenders insist on it
Lenders want to sit at the same table as everyone else. Without a cross-default, a borrower under pressure could keep one financier current while another quietly enforced and took the best assets. The clause means every financier hears the alarm at the same moment.
It also works as an early warning. Falling behind with one financier says something about credit risk across the whole business, so a lender would rather review the relationship then than wait for its own repayment to be missed. In practice most lenders use the clause to open a conversation and reset terms rather than to enforce straight away.
How borrowers negotiate it
The clause is standard, but the wording is negotiable. The usual asks are a materiality threshold so only debts above a set amount count, a cure period that matches the other contract, and a carve out for amounts you are disputing in good faith.
Scope matters just as much. A clause drafted across all related bodies corporate can pull a dormant subsidiary's argument into your main facility. Check how the contract defines financial indebtedness, because a wide definition covers leases, hire purchase and hedging as well as loans. Read the definitions, not just the clause heading, and have your lawyer mark up anything that reaches beyond the borrowing group.
Example
A transport operator runs a working capital facility with one bank and separate equipment finance with two other financiers. A dispute over a repair bill leaves one equipment contract two months in arrears. The bank facility is paid to the day, but its cross-default clause treats those arrears as a default on the working capital line as well. The bank suspends redraw while it reviews the file, so a small argument about a repair bill puts the funding that covers wages at risk until it is sorted out.
Not to be confused with
Frequently asked questions
How does a cross-default clause work?
It treats a default under any of your other finance agreements as a default under this one. The lender does not have to wait for you to miss a payment to it. Once triggered, it can suspend drawdowns, demand the balance back, or enforce whatever security it holds.
What triggers a cross-default?
Most often arrears or a breached covenant on another facility. Depending on the drafting it can also be triggered by insolvency events, a demand from another financier, or another lender simply gaining the right to accelerate. The definition of financial indebtedness decides which contracts count.
Is a cross-default clause normal in business loans?
Yes. Australian commercial lenders include one in most term loans, overdrafts and larger equipment facilities. It is rare to have it removed altogether. What borrowers do change is how wide it reaches, which is why the thresholds and definitions are worth reading closely.
Can you negotiate a cross-default clause?
Often you can soften it. Common outcomes are a minimum dollar amount before the clause applies, a grace period matching the other contract, an exclusion for genuine disputes, and limiting it to the borrowing group rather than every related company. Ask your lawyer or broker to raise it before signing.
What is the difference between cross-default and cross-collateralisation?
Cross-default is about events: a problem on one contract counts as a problem on another. Cross-collateralisation is about security: several assets stand behind several loans with the same lender. You can have either without the other, though large facilities often include both.
Related terms
Default
A default is a borrower's failure to meet the terms of a credit contract, usually by missing repayments, which lets the lender demand the balance and enforce its security.
Read definitionCovenants
Covenants are promises, obligations or restrictions written into a contract or recorded on land title that bind the parties, such as a borrower's promise to maintain minimum interest cover.
Read definitionFacility letter
A facility letter is a lender's written confirmation of the terms on which it proposes to provide a loan or other finance facility to a borrower.
Read definitionSecurity (collateral)
Security (collateral) is an asset or legal interest a borrower grants a lender, which the lender can take and sell to recover the debt if the borrower defaults.
Read definitionCredit risk
Credit risk is the possibility that a borrower or counterparty will default on their contractual repayments, leaving the lender or investor with a loss.
Read definitionTerm loan
A term loan is a lump sum advanced up front and repaid in scheduled instalments of principal and interest over a set term.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.