Debt Comes With Conditions
What can put you in default while every payment is on time?
The idea
Loan agreements attach covenants — ratios and behaviours you must maintain — and breaching one can make the whole balance repayable.
In the real world
A lender requires a minimum cash balance, tested quarterly.
Going deeper
Interest rate is the headline and covenants are the risk. A covenant is a separate promise — maintain this ratio, keep this much cash, do not take on further debt — tested periodically and independently of whether payments are current.
Breaching one is a default, which can make the entire balance repayable immediately. This is how a business that has never missed a payment ends up in a crisis: a quiet quarter drops a ratio below its threshold, and the lender acquires rights they did not have the week before. Reading the conditions before signing costs an hour and is the only point at which they are negotiable.
Where it stops applying
Lenders frequently waive technical breaches rather than call a loan, particularly for otherwise healthy borrowers. The risk is real but the outcome is usually a renegotiation on worse terms rather than immediate repayment.
Why it matters
It explains how a business that can comfortably service its debt can still be in default.
Try this today
Read the conditions in one finance agreement you hold, not just the rate.
Test yourself
A company has never missed a payment but drops below the minimum cash ratio in its loan agreement. What can the lender do?
Show the answer
Potentially call the entire loan. Covenants are separate promises from the repayment schedule, and breaching one is a default regardless of payment history. This is why the conditions matter as much as the interest rate.
Learn this in the feed Answering from memory, then again days later, is what makes it stick.