The Cross-Collateral Clause: When One Loan Default Puts All Your Assets at Risk

Business owners often assume each loan is separate. Miss a payment on one, and only that loan is in jeopardy. But many financing agreements contain a cross-collateral clause that changes the rules entirely. Default under one loan can put every loan—and every asset pledged as collateral—on the line.

What Is a Cross-Collateral Clause?

A cross-collateral clause allows the lender to secure all obligations with the same collateral. For example, if you take out Loan A secured by equipment and later Loan B secured by receivables, a default on Loan B can let the lender seize both the receivables and the equipment.

Why They’re So Dangerous

• One Default, Many Losses: A minor default on a small loan can trigger foreclosure on major assets.
• Hidden in Boilerplate: These provisions are often buried in the fine print of security agreements.
• No Escape Route: Even if you keep up payments on Loan A, a default on Loan B can still jeopardize Loan A’s collateral.
• Leverage for Lenders: Lenders gain maximum power to pressure repayment.

A Common Scenario

A small business borrows $250,000 to buy equipment, secured by the equipment itself. Later, it borrows another $50,000 line of credit secured by receivables. When cash flow tightens, the business defaults on the $50,000 line. The lender declares both loans in default and seizes the equipment—even though those payments were current. That’s the power of cross-collateral.

How to Protect Yourself

• Read Security Agreements: Don’t assume collateral is limited to one loan—check for cross-collateral language.
• Negotiate Carve-Outs: Limit collateral to specific loans, not “all obligations now or in the future.”
• Separate Lenders: If possible, use different lenders for different loans to avoid cross-collateralization.
• Consult Counsel: A quick review can prevent signing away more than you realize.

Don’t Let One Missed Payment Sink Everything

At JDE Law Firm, PLLC, I help business owners review financing agreements and fight lender overreach in default situations. If you’re signing—or struggling under—loan documents, make sure you know whether cross-collateral language is putting more than one deal at risk.

📞 NY: 718-966-0877 | NJ: 732-490-7120

👉 Book a Loan Document Review