Overview

A technical default occurs when a borrower violates a covenant or other non‑payment term in a loan agreement — for example, missing a reporting deadline, breaching a debt‑to‑equity covenant, or failing to maintain required insurance — even while timely making scheduled payments. Unlike payment defaults, technical defaults do not always trigger immediate acceleration or foreclosure, but they can give lenders contractual rights that materially affect the borrower’s financing options.

This guide explains practical waiver and remedy options borrowers can pursue, step‑by‑step negotiation tactics I use in practice, and how to document and present requests so lenders are more likely to grant relief. It cites consumer and regulatory resources where relevant (Consumer Financial Protection Bureau; Federal Reserve) and links to related FinHelp articles for deeper reading.

Sources: Consumer Financial Protection Bureau (cfpb.gov) and Federal Reserve research on credit agreements and lending practices (federalreserve.gov).

How technical defaults typically arise

Technical defaults commonly stem from:

  • Financial covenant breaches (e.g., debt service coverage, leverage ratios).
  • Reporting failures (late or missing financial statements, tax returns).
  • Negative covenants violations (unauthorized asset sales, undisclosed liens).
  • Affirmative covenant lapses (failure to maintain insurance or permits).

Because covenants are drafted to protect lenders, even small deviations can be designated a default. In my work advising business borrowers, about half of covenant breaches are avoidable with better calendar controls and forecasting; the other half involve external shocks like market downturns.

For background on typical covenant language and borrower obligations, see FinHelp’s pieces on how loan covenants affect borrowers and lenders and the practical guide to loan covenants for business borrowers.

Immediate steps after you learn of a technical default

  1. Read the notice and the loan agreement: Identify the exact covenant, the alleged breach date, and any cure period or notice requirements. Many agreements include short cure windows you must honor.

  2. Preserve evidence: Save emails, financial reports, board minutes, and any documents that explain the cause (e.g., delayed receivables, accounting changes). Start a breach‑response folder.

  3. Communicate promptly and in writing: Contact your lender’s relationship officer quickly—do not wait. Early, transparent communication increases the chance of a negotiated outcome.

  4. Assess materiality and contagion risk: Determine whether the breach is isolated or likely to lead to cross‑defaults on other facilities.

  5. Seek professional help: For complex commercial loans, involve counsel and an accountant experienced in covenant compliance and workout negotiations.

Waivers: what they are and how to get one

A waiver is a lender’s written agreement to ignore a specific breach for a defined period and on specified terms. Waivers are the most common remedy for technical defaults when the borrower is otherwise creditworthy.

Types of waivers:

  • One‑time waiver: Excuses a single breach and typically expires at a set date.
  • Continuing waiver: May cover a recurring reporting lapse for a fixed time.
  • Conditional waiver: Granted in exchange for concessions (higher interest, additional covenants, or fees).

Key negotiation points lenders expect to see:

  • Clear explanation of the cause and corrective plan.
  • Evidence of steps taken to fix the breach.
  • Financial forecasts showing covenant compliance going forward.
  • Compensating measures (additional collateral, guarantor support, or covenant resets).

In my experience, lenders respond best to concise, well‑supported requests that include a timeline and updated financials. Offer a short repayment or covenant cure plan rather than open‑ended promises.

Other contractual remedies: amendments, forbearance, and cures

  • Amendment: A permanent or long‑term change to the loan documents. Useful when the breach reflects a structural change (industry decline, M&A). Amendments often require lender counsel and can include fees and stricter terms.

  • Forbearance agreement: Lender agrees not to enforce remedies for a defined period while the borrower implements a recovery plan. Common in stressed situations — it buys time but often includes reporting and monitoring requirements.

  • Cure: If the contract allows, the borrower fixes the underlying issue within a cure period (e.g., obtain missing insurance, file late reports). Document the cure and provide proof to the lender immediately.

Choosing between these depends on the breach cause, lender appetite, and the borrower’s near‑term liquidity.

Legal and administrative options

If negotiation stalls, borrowers have several defensive options:

  • Demand for strict proof of default: Lenders must prove the breach under the loan agreement. Controlled discovery and counsel review can sometimes limit lender leverage.

  • Challenge based on waiver, estoppel, or ambiguous drafting: If the lender previously accepted conduct inconsistent with the current allegation, equitable defenses (like waiver or estoppel) may apply.

  • Bankruptcy protection: For businesses in severe distress, Chapter 11 can halt enforcement actions and allow restructuring. This is a significant step with long‑term implications and should be a last resort.

Legal paths are fact‑sensitive; early counsel involvement is crucial.

Preparing a waiver or amendment request: a practical checklist

  • One‑page executive summary: State the breach, the remedy requested (waiver/amendment), and the timeline to cure.
  • Attach current financial statements and latest forecasts (benchmarked to covenant tests).
  • Explain the cause succinctly and list corrective actions already taken.
  • Offer compensating protections if possible (additional collateral, reporting upgrades, personal guaranty).
  • Propose clear timeline and monitoring metrics (monthly covenant tests, interim reporting).
  • Identify required approvals (board consents, third‑party waivers) and their status.

A well‑packaged request materially increases the chance of a favorable outcome.

Common lender responses and negotiation tactics

  • Request for more information: Lenders often ask for supplemental materials. Respond quickly and completely.
  • Short, conditional forbearance: Expect reporting requirements and possibly higher pricing.
  • Covenant reset: Lenders may renegotiate numeric covenant levels to reflect current realities.
  • Demand for immediate cure or acceleration: Less common for technical defaults if the borrower is cooperative, but possible if the breach is severe or repeated.

Negotiation tips: be proactive, quantify the impact of the breach, and propose measurable milestones rather than ambiguous promises.

Documentation and recordkeeping to avoid future technical defaults

  • Maintain a covenant calendar with advance alerts 45–60 days before tests and filing deadlines.
  • Standardize financial close and review processes to minimize reporting errors.
  • Keep an issues log documenting any covenant waivers, amendments, or informal lender approvals.

These steps reduce the chance of inadvertent breaches and strengthen your position if a lender asks for remediation.

Real‑world examples (anonymized)

  • Mid‑market manufacturer: Missed a quarterly covenant due to an accounting change. We secured a three‑month waiver by offering monthly covenant testing, updated forecasts, and a modest fee. The lender agreed to a one‑time covenant reset.

  • Service firm: Missed filing a required lien release. Quick documentation and proof of corrective filings resulted in a simple cure and confirmation letter from the lender with no penalty.

These outcomes reflect a consistent pattern: prompt communication, clear documentation, and realistic remediation plans lead to better results.

Common mistakes to avoid

  • Waiting to inform the lender until after formal notice.
  • Sending incomplete or unverified financials.
  • Assuming verbal assurances are binding without written confirmation.

Avoiding these mistakes preserves options and trust with the lender.

When to get outside help

Engage counsel or a restructuring advisor when: multiple facilities or lenders are involved, acceleration or cross‑default risks exist, or a bankruptcy option is being considered. For smaller, isolated breaches a skilled CFO or accountant and a structured waiver request may suffice.

Professional disclaimer

This article is educational and not a substitute for legal or financial advice tailored to your situation. Consult an attorney or financial advisor before relying on any strategies discussed here.

Further reading

Authoritative sources referenced: Consumer Financial Protection Bureau (cfpb.gov) and the Federal Reserve (federalreserve.gov).