Reference
Business Lending Glossary
Plain-English definitions for the terms you'll encounter when applying for business funding — from factor rates to UCC filings.
Accounts Receivable (A/R) Financing
A type of financing where businesses leverage their outstanding invoices to secure funding. The lender advances a percentage of the invoice value, providing immediate working capital.
Accrued Interest
Interest that has accumulated on a loan but has not yet been paid. It represents the cost of borrowing that builds up over time between payment dates.
Amortization
The process of spreading loan payments over a set period, with each payment allocated between principal and interest. Typically, earlier payments have a higher proportion of interest.
Annual Percentage Rate (APR)
The yearly cost of a loan expressed as a percentage, including interest and certain fees. APR provides a standardized way to compare different loan offers.
Asset-Based Lending (ABL)
A business financing method secured by company assets like accounts receivable, inventory, equipment, or property. The loan amount is determined by the liquidation value of the pledged assets.
Automated Clearing House (ACH)
An electronic network for financial transactions that processes large volumes of credit and debit transactions in batches. In business funding, ACH is used for both loan disbursements and repayments — including the fixed daily or weekly debits common in ACH-structured merchant cash advances.
Balloon Payment
A large, lump-sum payment due at the end of a loan term. Balloon loans typically have smaller regular payments with a significant final payment that "balloons" in size.
Bankruptcy
A legal process for businesses or individuals unable to repay their debts. Chapter 11 allows businesses to reorganize, while Chapter 7 involves liquidation of assets.
Blanket Lien
A security interest that gives a lender rights to all of the assets of a borrower or a broad category of assets, rather than specific items. This provides comprehensive collateral coverage.
Bridge Loan
Short-term financing that helps "bridge the gap" between two transactions, such as buying a new property before selling an existing one. Typically has higher interest rates due to its temporary nature.
Business Credit Score
A numerical rating of the creditworthiness of a business, typically ranging from 0–100. Major business credit bureaus include Dun & Bradstreet, Experian Business, and Equifax Business.
Business Plan
A formal document outlining the goals, strategies, financial projections, and market analysis of a business. Often required when applying for certain types of business financing.
Capital Expenditure (CapEx)
Funds used by a business to acquire, upgrade, or maintain physical assets such as property, buildings, equipment, or technology. CapEx is often financed through term loans or equipment financing.
Cash Flow
The net amount of cash moving in and out of a business. Positive cash flow indicates that the liquid assets of a company are increasing, enabling growth and debt servicing.
Cash Flow Statement
A financial statement showing how changes in balance sheet accounts and income affect cash and cash equivalents. It breaks down operating, investing, and financing activities.
Collateral
Assets pledged by a borrower to secure a loan, which can be seized by the lender if the borrower defaults. Common business collateral includes real estate, equipment, inventory, and accounts receivable.
Commercial Real Estate (CRE) Loan
Financing specifically for purchasing, developing, or refinancing commercial properties like office buildings, retail spaces, warehouses, or multifamily housing.
Compound Interest
Interest calculated on both the initial principal and the accumulated interest over time. This results in interest earning interest, causing the total amount to grow at an increasing rate.
Cosigner
An individual who agrees to pay the debt of a borrower if they fail to meet the payment terms. Cosigners are often used when the primary borrower has limited credit history or poor credit.
Covenant
Conditions in a loan agreement that require the borrower to fulfill certain conditions or refrain from certain actions. Violation of covenants may trigger default or penalties.
Credit Line
A flexible loan arrangement where a business can borrow up to a specific limit and only pay interest on the amount used. The business can draw and repay funds as needed during the term.
Crypto-Secured Lending
Loans secured by cryptocurrency assets as collateral, allowing borrowers to access fiat currency without selling their digital assets.
Debt Consolidation
The process of combining multiple debts into a single loan, often to secure a lower interest rate, lower monthly payment, or simplified debt management.
Debt Service Coverage Ratio (DSCR)
A financial ratio measuring a business's ability to service its debt with its net operating income. A DSCR greater than 1 indicates sufficient income to cover debt payments.
Debt-to-Income Ratio (DTI)
A financial metric comparing monthly debt payments to monthly gross income. Lenders use DTI to assess a borrower's ability to manage monthly payments and repay debts.
Default
Failure to meet the terms of a loan agreement, typically by missing payments. Default can trigger penalties, increased interest rates, collateral seizure, or legal action.
Direct Lender
A financial institution that originates and funds loans directly, as opposed to a broker or marketplace that connects borrowers with lenders.
Down Payment
An initial upfront payment made when purchasing an asset with financing. The down payment reduces the loan amount and demonstrates the commitment of the borrower.
Equipment Financing
Loans or leases specifically for purchasing business equipment, with the equipment itself serving as collateral. Terms typically align with the expected useful life of the equipment.
Equipment Leasing
A financing arrangement where a business pays for the use of equipment over a specified period without owning it, often with options to purchase, upgrade, or return at the end of the lease.
Equity Financing
Raising capital by selling ownership shares in a business, rather than taking on debt. Investors receive partial ownership and potential returns based on business performance.
Escrow
A financial arrangement where a third party holds and regulates payment of funds required for two parties in a transaction. Often used in real estate financing to hold deposits or reserves.
Factor Rate
A decimal figure used to calculate the total repayment amount for merchant cash advances and certain other business financing products. For example, a factor rate of 1.3 means repaying $1.30 for every $1 advanced. Unlike an interest rate, a factor rate is applied to the original advance amount — it does not decrease as the balance is paid down.
Factoring
A financial transaction where a business sells its accounts receivable (invoices) to a third party (factor) at a discount. The factor pays the business upfront and collects directly from customers. Because repayment comes from the business's customers — not the business itself — factoring is not a loan and is not subject to the same legal scrutiny as merchant cash advances.
Fintech (Financial Technology)
Technology-enabled financial services that improve and automate financial transactions. In lending, fintech often includes online applications, algorithmic underwriting, and digital document processing.
Fixed Interest Rate
An interest rate that remains constant throughout the entire loan term, providing predictable payment amounts regardless of market interest rate fluctuations.
Floating Interest Rate
An interest rate that fluctuates over time based on changes to a benchmark rate like the prime rate, plus a fixed margin.
Franchise Financing
Specialized loans designed for purchasing or expanding a franchise business, often with terms tailored to specific franchise systems and their proven business models.
Gap Financing
Short-term financing used to cover the difference between available primary funding and the total amount needed to complete a project or transaction. Often used in real estate or acquisition deals.
General Lien
A claim against all of the property of a debtor, not limited to specific assets. This provides broad security for the lender but is less specific than a blanket lien.
Grace Period
A set period after a payment due date during which a borrower can make a payment without incurring late fees or penalties. Grace periods vary by lender and loan type.
Gross Revenue
The total amount of money generated from sales before any expenses, taxes, or deductions are subtracted. Often used in revenue-based financing calculations.
Guarantor
An individual or entity that agrees to pay the debt of a borrower if they default on a loan. Similar to a cosigner but may have different legal implications depending on jurisdiction.
Hard Money Loan
A short-term loan secured by real estate, typically with higher interest rates and fees but less stringent qualification requirements than traditional financing. Often used by real estate investors.
High-Yield Debt
Loans or bonds with higher interest rates due to the increased risk associated with the borrower. Often used by businesses with lower credit ratings or higher leverage ratios.
Income Statement
A financial statement showing a company's revenues and expenses over a specific period, resulting in net profit or loss. Also called a profit and loss (P&L) statement.
Installment Loan
A loan repaid through a series of regular, scheduled payments (installments) over a set period. Each payment typically includes both principal and interest.
Interest Rate
The percentage of a loan amount charged by the lender for the use of their money, usually expressed as an annual percentage rate (APR).
Interest-Only Loan
A loan structure where the borrower only pays interest for a specified period, with no reduction in principal. Often used in commercial real estate or bridge financing.
Interim Financing
Temporary financing used during a transitional period, such as during construction before permanent financing is secured or between the closing of a business acquisition and long-term financing.
Inventory Financing
A loan or line of credit that uses a business's inventory as collateral. Often used by retailers, wholesalers, and manufacturers to purchase inventory or manage seasonal fluctuations.
Invoice Factoring
A form of financing where businesses sell their unpaid invoices to a third party (factor) at a discount in exchange for immediate cash. The factor assumes responsibility for collecting payment from customers. Unlike a loan, there is no repayment obligation on the business — the factor collects directly from the business's customers.
Invoice Financing
A broad term for financing arrangements using unpaid invoices as collateral or as the basis for an advance. Includes both invoice factoring and invoice discounting.
IP-Secured Financing
Loans secured by intellectual property assets such as patents, trademarks, copyrights, or software. The value and liquidity of the IP determine loan terms and amounts.
Joint and Several Liability
A legal term used in loan agreements with multiple borrowers, meaning each borrower is individually responsible for the entire debt, not just their share.
Judgment Lien
A court-ordered lien placed against a borrower's property resulting from an unpaid judgment. This can affect a business's ability to secure additional financing.
Jumbo Loan
A loan that exceeds conforming loan limits. In business lending, it refers to loans significantly larger than standard offerings for that loan type.
Key Person Insurance
Life and disability insurance that compensates a business for financial losses resulting from the death or extended incapacity of important employees. Often required for certain business loans.
Kickout Clause
A provision in a loan agreement allowing either party to terminate the agreement under specific circumstances, such as failure to meet certain conditions or milestones.
Late Fee
A penalty charged when a loan payment is made after the due date or after the grace period has expired. Late fees are typically a percentage of the payment amount or a flat fee.
Lease Financing
An arrangement where a business gains use of an asset by making regular rental payments rather than purchasing it outright. Can include options to purchase the asset at the end of the lease term.
Lender
An individual, financial institution, or organization that provides funds to a borrower with the expectation of repayment, usually with interest or fees.
Leverage
The use of borrowed capital to fund an investment or business operation, magnifying both potential returns and risks. Often expressed as a ratio of debt to equity.
Liability
A company's financial obligations or debts owed to suppliers, lenders, or other parties. Liabilities appear on a business's balance sheet and affect its overall financial position.
Lien
A legal claim or right against a property, making it security for the payment of a debt or obligation. If the debt is not repaid, the lender can seize the property to satisfy the debt.
Line of Credit (LOC)
A flexible loan facility where a business can borrow up to a predetermined limit and pay interest only on the amount borrowed. The borrower can draw and repay funds repeatedly during the term.
Liquidity
The ease with which an asset can be converted to cash without affecting its market price, or a company's ability to meet short-term obligations with available assets.
Loan Agreement
A legally binding contract detailing the terms of a loan, including the amount, interest rate, repayment schedule, fees, covenants, and remedies for default.
Loan Origination
The process of creating a new loan, from application through underwriting to funding. Often includes an origination fee to cover the costs of this process.
Loan-to-Value Ratio (LTV)
A financial metric comparing the loan amount to the appraised value of the collateral securing the loan. Lower LTV ratios typically indicate less risky loans from the lender's perspective.
Lockbox
A service offered by banks where a business's customers send payments to a special post office box managed by the bank, which processes and deposits the payments. Often used in asset-based lending arrangements.
Market Value
The current estimated worth of an asset based on the price it would sell for in a competitive market. Used in determining collateral value for secured loans.
Maturity Date
The date when a loan becomes due and payable in full. At maturity, the borrower must repay any remaining principal balance, often through refinancing or a balloon payment.
Merchant Cash Advance (MCA)
A business financing product where a company receives a lump sum in exchange for an agreed-upon portion of future revenue. Two structures exist: CC Split MCAs, where repayment is a percentage of daily card processing volume; and ACH MCAs, where repayment is a fixed daily or weekly ACH debit regardless of revenue. The legal classification of ACH MCAs has been contested in courts — see our guide for details.
Mezzanine Financing
A hybrid form of capital that combines debt and equity financing, typically in the form of subordinated debt with equity conversion features. Often used in acquisitions or growth financing.
Microfinance
Financial services provided to small businesses or entrepreneurs who lack access to traditional banking services. Typically involves smaller loan amounts with more flexible terms.
Microloan
A small, short-term loan typically under $50,000, designed for startups, new small businesses, and entrepreneurs who may not qualify for traditional bank financing.
Negative Pledge
A covenant in a loan agreement where the borrower agrees not to pledge certain assets as collateral to other lenders, protecting the lender's position.
Net Operating Income (NOI)
A calculation used to analyze real estate investments that equals all revenue from the property minus all reasonably necessary operating expenses. Critical in commercial real estate lending.
Net Worth
The value of a business's assets minus its liabilities. For individuals, it's the value of personal assets minus debts. Often considered in loan qualification.
Non-Disclosure Agreement (NDA)
A legal contract between a business and a lender ensuring confidential information shared during the financing process remains protected.
Non-Recourse Loan
A secured loan where the lender can only seize the collateral in case of default and cannot pursue the borrower's other assets. Less common in business lending except for certain real estate loans.
Operating Expenses
The costs associated with running a business on a day-to-day basis, excluding capital expenditures. Often analyzed when determining a business's ability to service debt.
Opportunity Cost
The potential benefit lost when choosing one financing option over another. Businesses evaluate opportunity costs when deciding between different funding strategies.
Origination Fee
A fee charged by lenders to process a new loan application, typically calculated as a percentage of the total loan amount. This covers costs related to underwriting and servicing the loan.
Overdraft
A flexible financing arrangement allowing a business to withdraw more than is available in its account, up to a predetermined limit. Functions similarly to a line of credit tied to a checking account.
Owner Financing
A transaction where the seller of a business or property provides financing to the buyer instead of requiring them to secure a loan from a traditional lender.
Payment Schedule
A detailed timeline showing when loan payments are due, including the amount of each payment and how much goes toward principal and interest.
Peer-to-Peer Lending (P2P)
An alternative financing method where businesses borrow directly from individuals or institutional investors through online platforms, often with more flexible terms than traditional loans.
Performance Loan
A loan with terms that adjust based on the financial performance of the borrowing business. Better performance may result in more favorable rates or terms.
Personal Guarantee
A legal commitment from a business owner or executive to repay a business loan personally if the business cannot meet its obligations. Common in small business lending.
Prepayment Penalty
A fee charged by some lenders when a borrower pays off a loan before its maturity date. Designed to compensate the lender for expected interest income lost due to early repayment.
Prime Rate
The interest rate that commercial banks charge their most creditworthy customers. Often used as a benchmark for setting rates on business loans, with additional percentage points added based on risk.
Principal
The original amount borrowed in a loan, not including interest or fees. As payments are made, the principal balance decreases, reducing the amount of interest charged.
Private Equity
Investment capital from private investors or firms used to acquire ownership stakes in companies. While not debt financing, it's an alternative to loans for business funding.
Pro Forma Financial Statements
Projected or hypothetical financial statements showing the anticipated impact of a business decision, such as taking on new financing or making a major investment.
Purchase Order Financing
A short-term financing solution where a lender pays a company's suppliers to fulfill customer purchase orders. Repayment occurs when the customer pays for the delivered goods.
Qualified Business Income (QBI)
Net income, gain, deduction, and loss from a qualified trade or business, excluding capital gains/losses, dividend income, and interest income. Relevant for tax considerations in financing decisions.
Quick Ratio
A financial metric measuring a company's ability to pay short-term obligations with its most liquid assets. Also known as the acid-test ratio, calculated as (current assets − inventory) / current liabilities.
Recourse Loan
A loan that allows the lender to collect from the borrower personally if the collateral is insufficient to cover the debt in default. Most business loans are recourse loans.
Refinancing
The process of replacing an existing loan with a new loan, typically to secure better terms such as a lower interest rate, longer repayment period, or different payment structure.
Relationship Banking
An approach where lenders develop long-term relationships with business clients, potentially offering more favorable terms based on the strength and longevity of the relationship.
Return on Investment (ROI)
A performance measure used to evaluate the efficiency of an investment, calculated by dividing the benefit (return) by the cost. Important when evaluating financing for business projects.
Revenue-Based Financing (RBF)
A funding method where a business receives capital and repays it as a percentage of ongoing revenues. Repayment amounts flex with business performance, increasing in good months and decreasing in slower months.
Revolving Credit
A financing arrangement that allows a business to borrow up to a specified amount, repay it, and borrow again as needed. Credit cards and business lines of credit are common forms of revolving credit.
Risk Assessment
The process lenders use to evaluate the potential for loss on a loan, considering factors like the borrower's credit history, business stability, cash flow, collateral, and market conditions.
Rollover
The extension or transfer of debt from an expiring loan into a new loan. Can refer to extending short-term financing repeatedly or converting one type of loan to another.
SBA 504 Loan
A Small Business Administration loan program specifically designed for purchasing fixed assets like real estate and equipment, with up to 90% financing and below-market fixed rates.
SBA 7(a) Loan
The SBA's primary loan program for small businesses, providing funds for working capital, equipment, real estate, and refinancing debt. Offers longer terms and lower down payments than conventional loans.
SBA Loans
Business loans partially guaranteed by the U.S. Small Business Administration, reducing risk for lenders and often resulting in more favorable terms for borrowers. Common types include 7(a), 504, and microloans.
SBA Microloan
A Small Business Administration program providing loans up to $50,000 to help small businesses and certain non-profit childcare centers start up and expand. Administered through nonprofit community lenders.
Seasonal Line of Credit
A short-term financing solution designed specifically for businesses with cyclical sales patterns, allowing them to borrow during slow periods and repay during peak seasons.
Secured Loan
A loan backed by collateral that the lender can seize if the borrower defaults. Typically offers lower interest rates than unsecured loans due to reduced lender risk.
Securitization
The process of pooling various types of debt instruments (like loans) and creating marketable securities that can be sold to investors. Allows lenders to remove loans from their balance sheets and obtain additional funding.
Security Agreement
A contract between lender and borrower that establishes the lender's security interest in collateral, specifying the assets pledged and the lender's rights in case of default.
Security-Backed Financing
Loans where marketable securities (stocks, bonds, mutual funds) serve as collateral. Typically offers lower interest rates due to the liquid nature of the collateral.
Seller Financing
An arrangement where the seller of a business extends credit to the buyer, accepting payments over time rather than receiving the full purchase price at closing.
Short-Term Loan
A loan with a repayment period typically less than one year, used for immediate working capital needs, inventory purchases, or other temporary funding requirements.
Signature Loan
An unsecured loan based solely on the borrower's signature and promise to pay, without requiring collateral. Approval typically depends on credit history and business performance.
Simple Interest
Interest calculated only on the principal amount of a loan, not on previously accumulated interest. Contrasts with compound interest, which adds interest to both principal and accumulated interest.
Small Business Loan
A broad category of financing designed specifically for small businesses, encompassing various loan types from traditional term loans to specialized products like SBA loans or microloans.
Soft Costs
Expenses related to financing that don't involve physical assets, such as origination fees, legal fees, insurance, or due diligence costs. Often included in the total loan amount.
Startup Financing
Funding specifically for new businesses without established revenue or credit history. Options include angel investment, venture capital, microloans, crowdfunding, and personal assets.
Subordinated Debt
Loans that rank below senior debt in repayment priority if a borrower defaults. Carries higher interest rates due to increased risk but requires fewer restrictions than senior debt.
Syndicated Loan
A large loan provided by a group of lenders who work together to provide funds for a single borrower. Common for large corporations or projects requiring substantial capital.
Tax Lien
A legal claim against a business's assets due to unpaid taxes. Tax liens take priority over other creditors and can significantly affect a company's ability to secure financing.
Term Loan
A loan for a specific amount with a specified repayment schedule and fixed or floating interest rate. Typically used for established businesses looking to expand or refinance debt.
Term Sheet
A non-binding document outlining the basic terms and conditions of a business loan or investment. Serves as a blueprint for developing detailed, legally binding documents.
Title Search
An examination of public records to confirm a property owner's legal right to sell or use the property as collateral. Commonly used in commercial real estate financing.
Trade Credit
An arrangement where suppliers allow a business to purchase goods or services and pay for them later, typically within 30, 60, or 90 days. An informal type of short-term financing.
Tranche
A portion of a larger loan or financial security, often with different terms, interest rates, or risk levels. Common in structured financing and syndicated loans.
Treasury Management
Services offered by financial institutions to help businesses manage their cash flow, investments, and funding. Often part of relationship banking for commercial borrowers.
UCC Filing
A notice filed under the Uniform Commercial Code that publicly declares a lender's security interest in specified assets of a borrower. Protects the lender's rights to the collateral.
Underwriting
The process by which a lender evaluates a borrower's creditworthiness and loan application, assessing factors like credit history, financial statements, business plan, and collateral.
Unsecured Loan
A loan issued without collateral, based solely on the borrower's creditworthiness and promise to repay. Typically features higher interest rates than secured loans due to increased lender risk.
Upside-Down Loan
A loan where the borrower owes more than the underlying asset is worth. In business, this can occur with equipment or vehicle financing if the value depreciates faster than the loan is repaid.
Usage-Based Financing
A financing model where repayment terms are tied to the actual usage or performance of an asset, rather than fixed repayment schedules. Common in equipment or technology financing.
Valuation
The process of determining the current worth of a business or asset. Critical in secured lending to establish collateral value and in equity-based financing to determine ownership stakes.
Variable Interest Rate
An interest rate that can change over the life of a loan, typically tied to a benchmark like the prime rate. Can result in changing payment amounts as rates adjust.
Vendor Financing
An arrangement where a supplier provides a business with equipment, inventory, or services and allows payment over time, essentially extending a loan to their customer.
Venture Capital
Financing provided to early-stage, high-potential startups in exchange for equity. Not debt financing, but an alternative source of business funding for companies with growth potential.
Warehouse Line of Credit
A short-term revolving credit facility used by mortgage lenders or other loan originators to fund loans temporarily until they can be sold to investors in the secondary market.
Working Capital
The difference between a company's current assets and current liabilities, representing the funds available for day-to-day operations. A primary reason businesses seek short-term financing.
Working Capital Loan
Short-term financing designed to fund a company's everyday operations rather than long-term assets or investments. Common types include lines of credit, short-term loans, and invoice financing.
Write-Off
The accounting practice of removing an uncollectible debt from financial records, treating it as a loss. Lenders may write off loans that borrowers cannot repay after collection attempts fail.
Yield
The earnings generated from an investment over a specific period, expressed as a percentage of the investment's cost or current market value. In lending, it represents the return a lender earns on a loan.
Zero-Based Budgeting
A budgeting method where all expenses must be justified for each new period, starting from a "zero base." Used by businesses to determine funding needs for future periods.
Zero-Interest Financing
A promotional financing arrangement where no interest is charged during a specified period. Common for equipment purchases or vendor financing, but may include fees or other costs.
Zombie Debt
Old, written-off debt that is past the statute of limitations or otherwise legally uncollectible, but which debt collectors attempt to recover. Businesses should understand their rights regarding such claims.
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