We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What is a Cross Default?

Malcolm Tatum
By
Updated: May 16, 2024
Views: 34,903
Share

Cross defaults are provisions in which a borrower with multiple debt obligations defaults on one of the debts, triggering an automatic default on all other debts held by the same lender. The inclusion of a cross default provision is not uncommon with many banks, especially if the bank specializes in providing multiple loans and lines of credit to corporations. This type of default cross acceleration protects the interests of the lender, making it to take immediate action before any defaults on other debt instruments can take place.

Because cross default clauses are so common, they are often included in the terms and conditions of any basic loan contract. However, there are lenders that choose to not include any type of accelerated default clause in their loan contracts. Lenders who do include the provision as a matter of course often call the clause to the attention of the borrower before processing any new loans for the individual or company.

It is important to note that a cross default action will also apply to loans that are obtained through subsidiaries, in the event that the parent company defaults on a loan issued by a common lender. At the same time, a default on a debt obligation by the subsidiary can also make any loans issued to the parent company move into default, at the discretion of the lender. From this perspective, it is in the best interests of the borrower to make sure all obligations are honored on time, or attempt to make payment arrangements with the lender before any of the obligations move into default.

While a cross default covenant does protect the interests of the lender, the clause generally does not activate automatically. Because of the expenses involved with attempting to collect on a defaulted loan, the lender is likely to try working with the borrower to come up with an alternate solution. If the borrower is unwilling or unable to work with the lender to come up with a mutually agreeable solution, the cross default provision is invoked and legal action follows in short order.

Once the cross default provision is invoked, borrowers are not likely to have many options for recourse. Depending on the size and number of the loans held by the single lender, the expense of defaulting on the loans could seriously hinder a business operation. The collective default on two or more loans can also seriously damage the reputation and the credit rating of the company, making it hard for the business to find resources elsewhere to settle the debt action.

Share
SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.
Discussion Comments
By Talentryto — On Feb 09, 2014

Heavanet, it's also important to be in touch with your debtors if you are having trouble making your payments. This communication can also potentially help you avoid cross default if you make alternative payment arrangements with you debtors.

By Heavanet — On Feb 08, 2014

A cross default can really have a negative effect on your credit. It's best to prevent it from happening in the first place. Make a chart of your debts and when they are due to be sure you are never late with a payment that could potentially cause this ripple effect of your finances.

Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
Share
https://www.smartcapitalmind.com/what-is-a-cross-default.htm
Copy this link
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.