Reference
Business lending glossary
64 terms from loan agreements, term sheets, and underwriting conversations, defined the way they are actually used.
A
- Accounts receivable financing
- A loan secured by your unpaid invoices. You keep ownership of the invoices and keep collecting; you repay the advance. Distinct from factoring, which is a sale.
- Advance rate
- The percentage of an asset's value a lender will lend against. Roughly 80% for receivables, 50% for equipment at liquidation value, 20% to 50% for inventory.
- Amortization
- The schedule over which a loan's principal is repaid. It is not always the same as the term: a loan can have a five-year term and a twenty-five-year amortization, with a balloon at year five.
- Annual percentage rate (APR)
- The yearly cost of borrowing including interest and mandatory fees, expressed as a percentage. The only number that makes differently structured offers comparable. See APR vs. factor rate.
B
- Balloon payment
- A large lump sum due at the end of a loan whose amortization is longer than its term. It means you must refinance at that date, at whatever rates and whatever your financials look like then.
- Blanket lien
- A security interest covering all business assets rather than a named asset, filed as a UCC-1. It effectively makes you exclusive to that lender.
- Bridge loan
- Short-term financing covering the gap until longer-term financing or a sale closes. Priced for speed and short duration.
- Business credit score
- A score reflecting your business's own payment behavior — D&B PAYDEX, Experian Intelliscore, FICO SBSS. Separate from your personal FICO, and built through trade lines that report.
C
- Capital injection
- The borrower's own money contributed to a project. The SBA requires at least 10% on acquisitions and real estate, and more from startups.
- CDC (Certified Development Company)
- A nonprofit certified by the SBA to deliver the 504 program. It provides the second-mortgage portion of a 504 project.
- CDFI
- Community Development Financial Institution. A Treasury-certified mission lender serving communities and borrowers that conventional finance underserves. See CDFIs and community lenders.
- Collateral
- Assets pledged to secure a loan. Determines how far a lender will stretch on other factors, and affects pricing. See collateral and personal guarantees.
- Confession of judgment
- A clause in which the borrower pre-agrees to a judgment if the lender declares default, sometimes without notice or a hearing. Restricted in several states. Treat its presence as a reason to walk.
- Covenant
- A promise about the future condition of your business — a minimum coverage ratio, a leverage cap, a limit on new debt. Breaching one is a technical default even if every payment is current.
- Cross-default
- A clause making default on one obligation an automatic default on another. Links otherwise separate risks together.
D
- Debt service
- Total principal and interest payments due over a period, usually a year.
- Debt service coverage ratio (DSCR)
- Cash flow available for debt divided by total debt service. The single most important number in commercial underwriting. Most lenders want 1.15x minimum and are comfortable at 1.25x.
- Debt schedule
- A listing of every business obligation with its original amount, balance, rate, payment, maturity, and collateral. The document borrowers most often skip and lenders most often need first.
- Debenture
- The bond sold on the public market to fund the CDC portion of an SBA 504 loan. Its pricing sets your fixed rate.
E
- EBITDA
- Earnings before interest, taxes, depreciation, and amortization. A rough proxy for operating cash flow, used heavily in acquisition underwriting.
- Equity injection
- See capital injection.
F
- Factor rate
- A flat multiplier applied to an advance — 1.3 on $50,000 means $65,000 owed. Contains no information about time, which is why it is not comparable to an APR.
- Factoring
- Selling receivables to a third party at a discount for immediate cash. A sale, not a loan. See invoice factoring.
- FICO SBSS
- A small business scoring model blending the owner's personal credit, business credit, and financials into a 0 to 300 score. Used by many SBA lenders to pre-screen 7(a) applications.
G
- Guaranty fee
- The upfront fee the SBA charges a lender for guaranteeing a loan, calculated on the guaranteed portion and usually passed to the borrower. Not refundable on early repayment.
H
- Hard pull
- A credit inquiry recorded on your report that can reduce your score slightly. Contrast with a soft pull, used for prequalification, which does not.
I
- Interim financials
- Profit and loss and balance sheet covering the period since your last tax return. Lenders generally want them dated within 60 days.
J
- Joint and several liability
- Where multiple guarantors are each liable for the entire debt, not their ownership share. The standard in most guarantees and the clause that most often damages partnerships.
L
- Letter of intent (LOI)
- A non-binding outline of a proposed transaction. In an acquisition it is what you take to a lender to begin real conversations.
- Lien
- A legal claim against an asset securing a debt. Must be released when the debt is repaid — verify this yourself, because lenders do not always file the termination promptly.
- Loan-to-value (LTV)
- Loan amount divided by the appraised value of the collateral. Commercial real estate typically runs 65% to 80% conventionally, higher with an SBA guarantee.
M
- Maturity
- The date the loan must be fully repaid.
- Merchant cash advance (MCA)
- A purchase of future receivables repaid through daily or weekly debits, priced with a factor rate. See merchant cash advances.
- Micro-loan
- An SBA program up to $50,000 delivered through nonprofit intermediaries. See SBA microloans.
N
- NAICS code
- The industry classification code used by lenders and the SBA to determine eligibility and restrictions. Some lenders will not lend into certain codes at all.
- Non-recourse
- In factoring, an arrangement where the factor absorbs the loss if a customer fails to pay — usually only for insolvency, and typically excluding disputes, short-pays, and quality claims.
O
- Origination fee
- A fee charged for making the loan, commonly 1% to 5%. If deducted from proceeds it raises the effective rate materially.
- Owner-occupied
- Property the business itself uses. SBA requires 51% occupancy of an existing building or 60% of new construction. Investment property is not eligible.
P
- PAYDEX
- Dun & Bradstreet's business payment score, 1 to 100. Rewards paying ahead of terms, not merely on time.
- Personal guarantee
- A promise to repay personally if the business does not. Required from every 20%+ owner on SBA loans. The most consequential document you will sign.
- PLP (Preferred Lender Program)
- SBA-delegated authority allowing a lender to approve 7(a) loans without SBA review. Ask whether your lender has it — it removes weeks.
- Prepayment penalty
- A charge for repaying early. SBA 7(a) loans with terms of 15 years or more carry 5%, 3%, 1% in years one through three. 504 penalties decline over roughly ten years.
- Prime rate
- The base rate most variable business loans are priced against. The WSJ prime rate is a survey of the largest US banks. See our rates page for the current figure.
- Purchase order financing
- A lender pays your supplier directly against a confirmed customer purchase order. Expensive, but lets you accept orders you could not otherwise fund.
R
- Recourse
- In factoring, an arrangement where you must buy back invoices your customers do not pay. Cheaper than non-recourse; the risk stays with you.
- Retainage
- A percentage of a construction contract withheld until final completion, typically 5% to 10%. A major source of the cash-flow gap in contracting.
- Revolving credit
- Credit you can draw, repay, and draw again, with interest only on the outstanding balance. Distinct from products marketed as lines that actually amortize each draw separately.
- ROBS
- Rollover as Business Startup. A structure using retirement funds as business equity without an early-withdrawal penalty. Legal, complex, and requiring ongoing compliance.
S
- SBA
- The US Small Business Administration. It guarantees loans made by participating lenders rather than lending directly, except for disaster loans.
- SBA Form 159
- The disclosure of fees paid to any agent, packager, or broker on an SBA loan. If someone resists signing it, treat that as a serious warning.
- SBA Form 413
- The personal financial statement required from each guarantor on an SBA loan.
- SBA Form 1919
- The borrower information form for a 7(a) loan, covering eligibility, ownership, and character questions.
- SBLC
- Small Business Lending Company. A non-depository lender licensed to make SBA 7(a) loans. Often faster and more willing on startups and acquisitions than a bank.
- Seasoning
- How long a debt or an account must have existed before it qualifies for something — commonly used in refinancing rules.
- Seller note
- Financing provided by the seller of a business as part of the purchase price. On SBA acquisitions, a seller note on full standby can count toward part of the required injection.
- Standby
- An agreement that a creditor will take no payments until a senior loan is repaid. Full standby is what makes a seller note count toward an SBA equity injection.
T
- Term
- The length of time until the loan matures. Distinct from amortization, which is the repayment schedule.
- Term sheet
- A written summary of proposed loan terms, usually non-binding. Getting two is the most effective negotiating step available to a borrower.
- Time in business
- How long the business has operated, measured from formation or first operations. Two years is the most common hard threshold in commercial lending.
U
- UCC-1 financing statement
- The public filing that perfects a lender's security interest in your business assets. Visible to other lenders — and mined by brokers as a lead list, which is why the calls start after you borrow.
- UCC-3 termination
- The filing that releases a UCC-1 when a loan is repaid. Check that yours was filed; a stale lien will block your next loan.
- Underwriting
- The process of assessing whether and on what terms to lend. Mostly an exercise in testing whether cash flow covers the payment under adverse assumptions.
W
- Working capital
- Current assets minus current liabilities. Also used loosely to mean financing for day-to-day operations. See working capital loans.
- Work in progress (WIP)
- In construction and professional services, work performed but not yet billed. Real value that cash-basis statements do not show — prepare it separately when borrowing.