Resources
Business Loan Glossary
60 lending terms in plain English, from amortization to yield maintenance, so you can read a term sheet with confidence.
A
- Amortization
- Paying a loan off through regular payments that cover interest and part of the principal, so the balance reaches zero by the end of the term. Early payments are mostly interest; later payments are mostly principal.
- Annual Percentage Rate (APR)
- The yearly cost of a loan including interest and most fees, expressed as a percentage. It lets you compare offers that quote fees and rates differently.
- Asset-Based Lending
- A loan or credit line secured by business assets such as receivables, inventory or equipment. How much you can borrow depends on the value of those assets, not just credit history. Learn more
B
- Balloon Payment
- A large lump sum due at the end of a loan whose regular payments don't fully pay it off. Many commercial real estate loans have a 5- to 10-year term with a balloon, which is usually refinanced.
- Blanket Lien
- A lien on all of a business's assets rather than a specific item. Lenders often file one to secure working capital loans and lines of credit.
- Bridge Loan
- Short-term financing, usually 6 months to 3 years, that covers a gap: buying a property before selling another, finishing a renovation, or stabilizing a building before permanent financing. Learn more
- Business Credit Score
- A score from a business credit bureau (such as Dun & Bradstreet, Experian Business or Equifax Business) based on how the business pays its bills and debts. Lenders also check the owners' personal credit.
- Business Line of Credit
- A revolving credit limit you draw from as needed and repay, paying interest only on what you've drawn. Common for seasonal cash flow and inventory. Learn more
C
- CAPLines
- A group of SBA 7(a) credit lines for short-term and cyclical needs, including lines tied to specific contracts and to seasonal working capital.
- Cash Flow
- The money moving into and out of a business. Lenders care most about the cash left over after operating costs, because that's what repays the loan.
- Certified Development Company (CDC)
- A nonprofit lender certified by the SBA to provide the second-lien portion of SBA 504 loans, typically about 40% of the project. Learn more
- CMBS Loan
- A commercial mortgage that is pooled with others and sold to investors as commercial mortgage-backed securities. Usually fixed-rate and non-recourse, for larger stabilized properties. Learn more
- Collateral
- Assets pledged to secure a loan, such as real estate, equipment, inventory or receivables. If the loan isn't repaid, the lender can take and sell the collateral.
- Commitment Letter
- A lender's written promise to make a loan on stated terms and conditions, issued after underwriting and before closing.
- Conventional Loan
- A business or commercial real estate loan made by a bank or other lender without a government guarantee such as the SBA's. Learn more
- Covenant
- A condition in a loan agreement the borrower must meet, such as keeping a minimum debt service coverage ratio or providing annual financial statements.
D
- Debt Service Coverage Ratio (DSCR)
- Cash flow available for debt payments divided by the total debt payments. A DSCR of 1.25 means the business earns $1.25 for every $1.00 of debt payments; many lenders look for 1.15 to 1.25 or higher.
- Debt-to-Income Ratio (DTI)
- Monthly debt payments divided by monthly income. For business loans, lenders often look at the owners' personal DTI alongside the business's own coverage ratios.
- Default
- Failing to meet a loan's terms, most often by missing payments but also by breaking a covenant. Default can let the lender demand full repayment or take the collateral.
- Defeasance
- A way to pay off certain fixed-rate commercial loans, often CMBS loans, early by replacing the property as collateral with government securities that cover the remaining payments.
- Down Payment (Equity Injection)
- The cash or equity the borrower puts into a purchase or project. SBA 504 projects typically need 10%; start-ups and special-purpose properties may need 15% to 20%.
- Draw
- A disbursement of loan funds in stages, as with construction loans released as work is completed and inspected, or advances taken on a credit line. Learn more
E
- Equipment Financing
- A loan or lease used to buy equipment, with the equipment itself usually serving as collateral. Terms are typically matched to the equipment's useful life. Learn more
- Equipment Lease
- Paying to use equipment over a set term. A fair-market-value lease has lower payments and an option to buy at market value; a $1 buyout lease works like a purchase. Learn more
F
- Factor Rate
- A pricing method used for merchant cash advances and some short-term loans: a decimal multiplier such as 1.25, meaning you repay $1.25 for every $1.00 received. It is not an interest rate, and the equivalent APR is often much higher.
- Factoring (Invoice Factoring)
- Selling unpaid invoices to a factoring company for an immediate advance, typically 70% to 90% of the invoice value, with the rest paid, minus fees, when the customer pays. Learn more
- Fixed Rate
- An interest rate that stays the same for the loan term, or for a set period, so payments are predictable.
G
- Global Cash Flow
- A lender's combined analysis of the business's cash flow and the owners' personal income and debts, used to confirm all obligations can be paid.
- Guarantee Fee (SBA)
- A fee the SBA charges on the guaranteed portion of a 7(a) or 504 loan. It varies by loan size and term, and can usually be financed into the loan.
I
- Interest-Only Period
- A period at the start of a loan when payments cover only interest, lowering payments while a project is completed or a property stabilizes.
- Invoice Financing
- Borrowing against unpaid invoices while keeping control of collections, as opposed to selling them in factoring.
L
- Lien
- A lender's legal claim on an asset that secures a loan. The first lien gets paid first if the asset is sold.
- Loan-to-Cost (LTC)
- The loan amount divided by a project's total cost, including land, construction and soft costs. Construction and bridge lenders use it to size loans.
- Loan-to-Value (LTV)
- The loan amount divided by the appraised value of the property. A $750,000 loan on a $1,000,000 building is 75% LTV.
M
- Maturity Date
- The date the loan's remaining balance is due in full.
- Merchant Cash Advance (MCA)
- An advance against future card or bank deposits, repaid through daily or weekly withdrawals and priced with a factor rate. Fast to get, but usually far more expensive than a loan.
- Mezzanine Financing
- Debt that sits between the senior loan and the owners' equity, with higher rates than senior debt. Often used to reduce the equity needed for an acquisition or project.
N
- Non-Recourse Loan
- A loan where the lender can collect only from the collateral, not the borrower's other assets, except for listed exceptions such as fraud. Common for CMBS and some larger commercial real estate loans.
O
- Origination Fee
- A fee charged to process and fund a loan, usually a percentage of the loan amount.
P
- Personal Guarantee
- An owner's promise to repay the business loan personally if the business can't. The SBA requires one from every owner of 20% or more.
- Pre-Qualification
- An early estimate of what you may qualify for, based on basic information about the business. It is not a loan approval or a commitment.
- Prepayment Penalty
- A fee for paying a loan off early. SBA 7(a) loans with terms of 15 years or more carry one only if paid down early in the first three years.
- Prime Rate
- The benchmark rate banks charge their most creditworthy customers, published by The Wall Street Journal and currently around 7%. Many business loans, including most SBA 7(a) loans, are priced as prime plus a spread.
- Principal
- The amount borrowed, or the part of the balance still owed, not counting interest.
- Promissory Note
- The signed document in which the borrower promises to repay the loan on stated terms.
R
- Recourse
- The lender's right to collect from the borrower or guarantors beyond the collateral if the loan isn't repaid.
- Refinancing
- Replacing an existing loan with a new one, often to lower the rate, extend the term, take cash out or replace a loan that is coming due.
- Revolving Credit
- Credit you can draw, repay and draw again up to a limit, like a line of credit, as opposed to a term loan funded once.
S
- SBA 504 Loan
- An SBA program for owner-occupied real estate and long-life equipment, split between a bank loan, a CDC loan with a long-term fixed rate, and typically 10% down. Learn more
- SBA 7(a) Loan
- The SBA's main loan program: up to $5 million for working capital, equipment, real estate, acquisitions and refinancing, with part of the loan guaranteed by the SBA. Learn more
- SBA Express Loan
- A faster SBA 7(a) option for loans and lines of credit up to $500,000. The SBA responds to the lender within 36 hours. Learn more
- SBA Guarantee
- The share of an SBA loan the government repays the lender if the borrower defaults: 85% on 7(a) loans of $150,000 or less, 75% on larger ones and 50% on SBA Express. It protects the lender, not the borrower.
- SOFR
- The Secured Overnight Financing Rate, a benchmark that replaced LIBOR. Many floating-rate commercial and bridge loans are priced as SOFR plus a spread.
T
- Term Loan
- A lump sum repaid over a set period with regular payments, used for one-time needs such as an expansion or equipment purchase. Learn more
- Term Sheet
- A non-binding summary of a proposed loan's main terms, such as amount, rate, term, fees and collateral, issued before full underwriting.
U
- UCC-1 Filing
- A public notice filed with the state that a lender has a security interest in a business's assets, under the Uniform Commercial Code.
- Underwriting
- The lender's review of a loan request: financial statements, cash flow, credit, collateral and the business plan, to decide whether to lend and on what terms.
V
- Variable Rate
- An interest rate that moves with a benchmark such as the prime rate or SOFR, so payments can change over the loan term.
W
- Working Capital
- Current assets minus current liabilities: the cash available for day-to-day operations. Working capital loans cover payroll, inventory and timing gaps. Learn more
Y
- Yield Maintenance
- A prepayment penalty on some fixed-rate commercial loans that compensates the lender for the interest it would have earned if the loan had run to maturity.
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