TL;DR: A material adverse change (MAC) clause lets a lender respond if something significantly and negatively changes a borrower's business or prospects. It protects the lender against major deterioration in the borrower’s position, between signing and funding, or over the life of a facility. What counts as "material" is defined in the loan documents.
A material adverse change clause gives a lender certain rights if the borrower's business suffers a significant negative change, for example, a sharp drop in revenue, the loss of a major customer, or a serious legal or financial setback. Depending on how it is drafted, a MAC clause may allow a lender to decline to fund, accelerate repayment, or renegotiate terms.
The clause exists because circumstances can change between signing a term sheet and funding a loan, and over the life of a facility. It is a backstop against serious deterioration, not a tool for routine fluctuations.
The key question is how "material adverse change" is defined. Tightly drafted clauses limit the lender's discretion to genuinely significant events; broad ones leave more room for interpretation. Founders reviewing a facility should understand exactly what could trigger a MAC clause and what the lender could do as a result.
Is a MAC clause unusual? No. Some form of material adverse change provision is common in loan agreements. The detail is in how narrowly or broadly it is defined.
Does a minor bad quarter trigger a MAC clause? Generally not. The bar is a material adverse change, meaning a significant negative event, not ordinary variation in performance, though the precise threshold depends on the wording.
Related terms: Covenant · Term Sheet · Default · Due Diligence
