TL;DR: A default occurs when a borrower fails to meet the terms of a loan, whether by missing a payment (a payment default) or by violating another obligation (a covenant or technical default). The loan agreement defines what counts as a default and what the lender may do in response.
A default is a breach of a loan's terms. The most familiar form is a payment default, missing a scheduled interest or principal payment. There are also non-payment defaults, such as breaching a covenant, providing inaccurate information, or failing to meet another condition in the agreement. The loan documents set out precisely what constitutes a default for that facility.
When a default occurs, the lender typically gains certain rights, which may include charging default interest, accelerating the loan so the full balance becomes due, or enforcing against any security. Many agreements provide a cure period, a window in which the borrower can remedy the breach before those rights take effect.
A default is not the same as an immediate loss for either side. In practice, lenders and borrowers commonly work to resolve a default rather than escalate it, through a waiver, an amendment, a restructured repayment, or additional time. Most lenders prefer a workable resolution to enforcement, particularly where the underlying business remains viable. The practical lesson for founders is to communicate potential issues early; a potential breach raised in advance is far easier to manage than one discovered after the fact.
Does missing one payment mean immediate enforcement? Usually not. Many agreements include a cure period, and lenders generally seek to resolve a default before taking more serious steps.
What is a covenant default? A breach of a covenant, a condition in the loan agreement, rather than a missed payment. It is still a default, but it signals a problem rather than an immediate failure to pay.
Related terms: Covenant · Senior Debt · Material Adverse Change (MAC) Clause · Maturity Date
