Technical default is understood as the consequence of not complying with the provisions previously stipulated in a loan agreement that is related to a creditor, that is, technical default is the result of not fulfilling a loan condition, and has nothing to do with failure to pay a scheduled loan. Business loans contain positive and negative covenants. The requirements and restrictions put in place in a given contract are used to protect both the lender and the business. Affirmative acts include taxes and the maintenance of certain levels of insurance. For their part, negative pactsThey can restrict a business from disposing of assets or changing the nature of its business. A technical default will also result in you being paid in full.
Therefore, the technical default does not arise from a lack of payment but from a breach of one of the commitments agreed in a loan as an example we can say that a case of technical default occurs when the lack of payment of maintenance and repair of the building, property taxes, property insurance premiums and for a business that may be failing to meet promised operating ratios.
This type of default is based on the violation of the commitments assumed or clauses in the contracts of a debt that companies require in order to maintain certain levels of capital or their financial ratios. Obligations in debt contracts that limit or prohibit corporate actions could affect the position of creditors. It should be noted that the breaking of negative covenants is rare compared to violations of obligations to do.
