The defaults that have nothing to do with missing a payment

Owners tend to read the default section as a list of ways to fall behind. It is usually a list of ways to breach, and payment is one item. Here are the categories, in the order they cause trouble.

Covenant defaults

Promises about how you will run the business while the money is outstanding.

• Taking additional financing without consent. The anti-stacking covenant is the most frequently tripped one in short-term funding, and a new UCC filing makes it easy to discover.
• Changing your bank account or your card processor, or moving deposits away from the account being debited.
• Closing a location, relocating, materially reducing operating hours, or ceasing to operate.
• Selling assets outside the ordinary course of business.
• A change of ownership, adding a partner, or transferring membership interests.
• Granting another lien on collateral already pledged.

Consent is usually available on request and rarely granted retroactively. If you know a change is coming, ask before, in writing.

Information defaults

Failing to deliver something. Monthly bank statements or financials on request, tax returns, a certificate of insurance, notice of a material event within a stated number of days. These are easy to breach by inattention, and they hand the holder a clean, provable default that has nothing to do with your cash position.

Representation defaults

Everything you certified as true at signing. If the application overstated revenue, omitted an existing position, or the entity was not in good standing, the misstatement is generally a default from the start, discoverable later, and in some circumstances it is more serious than a breach of contract. Answer the application questions accurately even when the broker suggests a rounding.

Insolvency defaults

Filing bankruptcy, having a petition filed against you, making an assignment for the benefit of creditors, a receiver being appointed, or being insolvent as a matter of fact. Note that the last one does not require any filing by anyone.

Third-party defaults

Events involving people who are not parties to your agreement:

• A judgment entered against the business, often above a stated dollar threshold.
• A tax lien filed by a federal or state authority.
• Another creditor levying, garnishing or attaching assets.
• Cross-default: a default under any other agreement between you and this funder or any of its affiliates. One deal going bad can put every deal with the same group into default simultaneously.

Collateral defaults

Letting insurance lapse, loss or material damage to collateral, or the secured party deeming itself insecure with respect to the collateral.

Payment-adjacent defaults

Not missing a payment, but interfering with one. Revoking the ACH authorization, placing a stop payment, closing the debited account, disputing a properly authorized debit, or a stated number of returned items within a period. These sit in the default list of most agreements precisely because they are the natural reaction to pressure.

Material adverse change

The catch-all. Wording varies, and the common form gives the holder discretion: any event that, in the holder's good faith judgment, materially impairs the business's prospect of performance. Whether such a clause can be invoked in a given situation is a legal question that depends on the wording and the state.

Why the no-waiver clause matters more than it reads

A short paragraph near the back says that no failure or delay in exercising a right operates as a waiver, and that accepting a late or partial payment does not waive any default. It is easy to skim. It is the clause that makes every other default in this article durable.

The pattern of acceptance did not create a new course of dealing. That is what the clause was drafted to prevent. Whether it succeeds in a given case turns on the wording and the state, but the planning assumption should be that it does.

So treat a default nobody mentioned as outstanding rather than forgiven. If you need it gone, ask for a written waiver of that specific event. A funder that will not give one has answered a useful question cheaply.

What follows from all of this

Three practical points. First, a default can exist without anyone telling you, and it does not expire on its own — a holder can decline to act now and rely on it later, particularly where the agreement contains a no-waiver clause saying that accepting late performance waives nothing. Second, defaults are usually cross-referenced, so one breach can trigger several. Third, the remedies section generally treats every event of default identically, which means an insurance lapse and a missed payment can trigger the same list.

Before you sign, take ten minutes and mark every item on the list you might realistically do in the next year. Ask for those to be carved out or made subject to consent not to be unreasonably withheld. After you sign, put the reporting obligations in a calendar.

This is general information, not legal advice. Whether a specific clause has been breached, and what that permits, depends on your contract's exact words and on your state's law — a lawyer licensed in your state is the person to ask.

The notice-and-cure table to build before you sign

Go through the default section once with a blank page and build four columns for each item: what the event is, whether the holder must give notice before it counts, how many days you get to cure it, and what it triggers.

Three shapes come out of it.

• Defaults with notice and a cure period. Usually the reporting and insurance items. These you can live with.
• Defaults with no cure at all. Insolvency, misrepresentation, and in many agreements the anti-stacking covenant. Nothing fixes these afterwards.
• Defaults where the text is unclear. Ask about these in writing before signing; the ambiguity will not resolve in your favour later.

Then ask for three changes. Notice and a stated cure period on every reporting and administrative item. A materiality qualifier on representations, so an ordinary commercial dispute is not a breach. And consent "not to be unreasonably withheld or delayed" on the covenants you can foresee tripping — a new bank account, a second location, a partner buy-in, an equipment lease.

The four you are most likely to trip by accident

1. Changing bank or processor. Ordinary housekeeping, and a default in most short-term agreements. Ask first, in writing, every time.
2. Equipment finance during the term. Many anti-stacking clauses are drafted widely enough to catch a lease. Read the definition of additional financing rather than assuming.
3. A lapsed certificate of insurance. The policy renewed, the certificate naming the lender did not get sent, and the file shows a collateral default.
4. A judgment you are contesting. Many agreements trigger on entry above a threshold, with no carve-out for one under appeal.