Incipient Default

Incipient default occurs when a borrower appears to be heading toward defaulting on its debt. Incipient means the beginning stages of something. A borrower in incipient default happens when a borrower's financial standing has tipped and they are on a path towards default. It is the beginning stages of a person or company's inability to service a debt obligation.

Incipient default occurs when a borrower starts to show beginning stages of inability to service a debt obligation. It can mean failing to make principal or interest payments, or signs such as increasing debt ratios that the borrower may soon be unable to make payments. Within the loan arrangement, the lender can make specific provisions regarding an incipient default. Such provisions may place covenants on the borrower that govern their ability to take on additional debt or stipulate how they use money from the sale of assets. Incipient defaults may be determined based on current business problems, such as an illiquid balance sheet or a low quick ratio.