Loan Agreement Review in Australia: Covenants, Default, and the PPSR

A business loan looks like a simple deal: borrow X, pay it back over Y years at Z%. The actual loan agreement is rarely simple. Covenants you didn’t notice can trigger default before you’ve missed a single payment. Security registered over your assets under the Personal Property Securities Act 2009 can survive long after the loan is repaid if not properly discharged. Cross-default clauses can let one lender collapse your entire debt structure on the back of an unrelated event.

Before signing a business loan agreement of any size, the contract review needs to surface the covenants and default triggers.

The clauses that matter most

• Financial covenants. Debt service coverage ratio (DSCR), interest coverage, gearing ratio, minimum tangible net worth. Test them against your forecasts — covenants set too tight will trip during normal trading variation, not just real distress.
• Reporting obligations. Monthly management accounts, quarterly compliance certificates, annual audited statements. Failure to deliver on time can be a default event in itself.
• Default and cross-default. What constitutes default beyond non-payment? Material adverse change clauses, change of control, change of management, breach of any other agreement (cross-default to leases, supplier contracts, other facilities).
• Security and PPSR registration. What’s secured? General security agreement (over all present and after-acquired property), specific security over named assets, or guarantees? PPSR registration must be discharged on payout — many lenders are slow, leaving “ghost” security interests on your registry years later.
• Personal guarantees. If you sign as a director-guarantor, your personal assets back the company debt. Cap the guarantee amount where possible. Watch for “all-monies” guarantees that cover any future debt the company owes the lender.
• Interest rate mechanics. Fixed, variable, base rate margin, default rate (often base + 4-5%), capitalisation of unpaid interest.
• Drawdown conditions. Conditions precedent to drawdown — valuations, insurance, security registrations, legal opinions. Missing one delays your funding.
• Prepayment and break costs. Can you prepay? At what cost? Fixed-rate loans usually carry break-cost calculations that can run into tens of thousands.

Common red flags

• “Material adverse change” clauses drafted broadly enough to give the lender discretionary default rights at any time
• Annual review clauses letting the lender unilaterally amend terms or call the loan
• Cross-collateralisation across multiple loans — default on one defaults all
• Indemnities that survive loan repayment indefinitely
• “All-monies” PPSR registrations securing future debt as well as the current loan
• Receiver/administrator appointment rights on minor breaches

What Claim Done’s contract review delivers

Upload the loan agreement (and any security documents, guarantees, and term sheets). The review returns an A4 PDF flagging covenant headroom, default trigger breadth, PPSR scope, guarantee exposure, and prepayment costs. The report sets out good, fair and watch points, key obligations, fees and penalties found, and questions to raise with the other side. Flat $49 fee, 24/7.

The covenant-trip pattern that ruins businesses

The most common loan-default scenario isn’t missed payments — it’s a covenant trip on a quarterly compliance certificate. Revenue softens for one quarter, the DSCR ratio drops below the threshold, and the lender writes to declare default. Default rates kick in (often base + 4-5%), the lender reserves the right to call the loan, and any cross-default provisions in other contracts start cascading. The borrower is technically in default while still trading and paying every instalment. The fix is to negotiate covenant headroom UP FRONT — set DSCR thresholds with at least 25% buffer over forecast, and include cure rights (right to inject equity to fix the breach within 30 days). These negotiations are routine but only happen if you spot the issue before signing.