Default Clauses & Workouts
“When Things Go Sideways”
A Default Clause outlines the specific events or conditions under which a loan is considered in default — triggering the lender’s right to take action (like accelerating the loan, enforcing remedies, or initiating a workout).
Types of Default
Default Type | Description | Example |
Payment Default | Borrower misses a required principal or interest payment | Missed March loan payment |
Covenant Default | Borrower breaches a financial or reporting covenant | DSCR falls below 1.2x or no updated P&L |
Cross Default | Default on a separate agreement triggers this loan’s default | Default on another bank loan activates this |
Material Adverse Change (MAC) | Catch-all for major negative shifts | Major lawsuit, key customer loss, etc. |
Bankruptcy/Insolvency | Borrower enters bankruptcy or liquidation | Involuntary or voluntary filing |
What Happens After a Default?
Lenders typically take measured steps — not immediate foreclosure. The path forward often depends on borrower cooperation, viability, and loan structure.
Workouts: When You Renegotiate Instead of Repossess
A workout is a negotiated restructuring of a defaulted loan to avoid legal action, foreclosure, or liquidation — giving the borrower breathing room and preserving the lender’s chance at recovery.
Common Workout Tools
Tool | Purpose | Example |
Forbearance Agreement | Lender agrees to hold off on enforcement | 90-day pause while borrower sells an asset |
Loan Modification | Change terms: interest rate, maturity, etc. | Extend 5-year term to 7 years |
Re-margining | Add equity or collateral | Borrower contributes $50k to rebalance LTV |
Waiver Letter | Lender formally waives default | Covenant breach forgiven for 1 year |
Sale/Refinance Strategy | Structured exit over time | Borrower lists property, finds new lender |
Borrower Perspective: Keep the Dialogue Open
Communicate proactively — before a missed payment, if possible
Be prepared to share updated financials, business plans, and collateral info
Understand the cost of workouts (legal fees, restructuring costs, higher rates)
Don’t assume the lender wants your business to fail — they usually want it to survive
Default doesn’t have to mean disaster — but silence almost always makes it worse. From a borrower’s standpoint, the smartest move is to communicate early and often, especially if financial stress is on the horizon. Lenders don’t like surprises; what they do respect is a borrower who’s proactive, transparent, and engaged in finding solutions.
Start by notifying your lender before a payment issue occurs, if possible. Provide updated financials, explain the root cause (supply chain disruption, delayed receivables, customer loss, etc.), and outline any internal actions you’re taking. Even better? Present a clear proposal — whether it’s a short-term forbearance, extended maturity, or updated covenant package.
Remember: the goal of most lenders isn’t to pull the plug — it’s to protect their capital while keeping you operational. A cooperative borrower often buys time, flexibility, and goodwill. But a borrower who goes dark or plays defense will likely trigger stricter remedies, reduced options, and higher legal costs.
A well-handled workout can preserve your business, your credit relationships, and your reputation. So when things get tight, don’t shut down — lean in and lead the conversation.