Find Me Funders
Cross-collateralization
Also called cross collateral, cross-collateral clause, dragnet clause.
A clause making the collateral for one facility secure every other obligation to the same lender, so a default on one contaminates all of them.
Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.
What it means
Two related clauses do this work. A cross-collateral clause says the security given for this transaction also secures all other present and future obligations to the lender. A cross-default clause says a default under any agreement with the lender, and sometimes with its affiliates, is a default under this one. Together they turn a portfolio of separate deals into a single exposure.
The setting where it surprises people most is equipment finance. A business that leases five machines from the same lessor over five years, each on its own schedule, may find that the master lease cross-collateralizes them all. Paying off machine one does not release it while machines two through five remain outstanding, and a dispute on the newest schedule can put the oldest, fully paid asset at risk.
The same structure appears in bank relationships through dragnet clauses in the security agreement, in ABL facilities across all collateral pools, and in funder families where several funding entities share ownership and cross-default across their paper.
Courts in some states read dragnet clauses narrowly, particularly where the later debt is of a different character or the borrower could not reasonably have expected it to be covered, but the analysis is state-specific and the clause is usually enforced as written between commercial parties.
Where this one catches people
The clause is discovered at payoff, not at signing. A business paying off one lease and asking for its title or lien release is told the release cannot be given because other schedules remain open. Before consolidating a relationship with one lessor or lender to get better pricing, ask in writing whether the facilities are cross-collateralized and what release requires.
Where you will meet this term
Read next
Cross-collateralization — common questions
What does cross-collateralization mean?
A clause making the collateral for one facility secure every other obligation to the same lender, so a default on one contaminates all of them.
Where does cross-collateralization catch people out?
The clause is discovered at payoff, not at signing. A business paying off one lease and asking for its title or lien release is told the release cannot be given because other schedules remain open. Before consolidating a relationship with one lessor or lender to get better pricing, ask in writing whether the facilities are cross-collateralized and what release requires.
Is cross-collateralization the same as an interest rate?
Cross-collateralization is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does cross-collateralization apply to?
Merchant Cash Advance, Term Loan, Business Line of Credit, Equipment Financing, Asset-Based Lending.
Is there a worked example of cross-collateralization?
Not on this entry. Where a term is arithmetic, the arithmetic is shown; this one is not primarily a calculation.
What else should I read alongside cross-collateralization?
Blanket lien, Capital lease, Collateral, Covenant, Default.
Has this definition been checked?
Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.