When it comes to credit agreements, there are a lot of technical terms that borrowers need to be aware of. Two of the most common terms are cross-default and cross-acceleration. While they may sound similar, they have different implications for borrowers.

Cross-default refers to a situation where a borrower is in default on one of their loans, which triggers a default on their other loans. This means that if a borrower is unable to make the payments on one loan, their other creditors can demand immediate payment as well. The purpose of cross-default clauses in credit agreements is to protect lenders by ensuring that they are not left in a position where they are at risk of losing their investment.

Cross-acceleration, on the other hand, is a provision in a credit agreement that allows a lender to demand immediate payment of all outstanding debt if the borrower defaults on a particular loan. Unlike cross-default, cross-acceleration only affects the loan in question. It does not trigger defaults on other loans.

To understand the difference between cross-default and cross-acceleration, consider the following example. Let`s say that a borrower has three loans outstanding, each with a different lender. If the borrower is in default on one of the loans, the cross-default clause in the other two loans would be triggered, and the lenders could demand immediate payment of all outstanding debt. This means that the borrower would be required to repay all three loans, even though only one loan was in default.

On the other hand, if the credit agreement includes a cross-acceleration clause, the lender of the loan in default could demand immediate payment of all outstanding debt related to that loan only. This means that the borrower would only be required to repay the defaulted loan, not all outstanding loans.

In summary, cross-default and cross-acceleration are two common clauses in credit agreements that borrowers should be aware of. Cross-default can have far-reaching consequences, triggering defaults on all outstanding loans, while cross-acceleration only affects the loan in question. As a borrower, it`s important to understand the implications of these clauses and ensure that you are able to meet your obligations under the terms of your credit agreements.