Glossary
Commercial lending terms, in plain English
62 definitions covering the vocabulary lenders use in term sheets, underwriting, and closing documents — written so a business owner can act on them.
A
- Accounts Receivable (AR) Aging
- A report grouping outstanding customer invoices by how long they have been unpaid, typically in 30-day buckets. Lenders use it to size a borrowing base and judge collection quality.
- Advance Rate
- The percentage of a collateral value a lender will advance. Invoice factoring commonly advances 80% to 95% of face value; inventory facilities often advance 50% to 80% of liquidation value.
- Amortization
- The schedule over which a loan's principal is repaid. A loan can have a 25-year amortization but a 5-year term, meaning payments are calculated over 25 years with a balloon due at year five.
- Annual Percentage Rate (APR)
- The annualized cost of borrowing including interest and most fees. APR is the only reliable way to compare offers priced differently, such as a term loan against a factor-rate advance.
- Asset-Based Lending (ABL)
- Lending secured primarily by business assets — receivables, inventory, equipment, or real estate — rather than by cash flow history. Availability rises and falls with the collateral base.
B
- Balloon Payment
- A large lump-sum principal payment due at the end of a loan term when the amortization period is longer than the term. Usually retired through refinance or sale.
- Blanket Lien
- A security interest covering all business assets rather than a specific item. Filed as an all-asset UCC-1 and common on working capital loans and lines of credit.
- Borrowing Base
- The dollar amount of eligible collateral against which a revolving facility can be drawn, calculated by applying advance rates to receivables and inventory after excluding ineligible items.
- Bridge Loan
- Short-term financing, usually 6 to 24 months and interest-only, used to close quickly or reposition an asset until permanent financing or a sale takes it out.
- Business Line of Credit
- A revolving credit facility a business can draw, repay, and redraw. Interest accrues only on the outstanding balance.
C
- Capitalization Rate (Cap Rate)
- A property's net operating income divided by its value or purchase price. Used to value income-producing commercial real estate and compare returns across markets.
- Certified Development Company (CDC)
- A nonprofit certified by the SBA to originate the debenture portion of an SBA 504 loan, typically 40% of the project cost at a long-term fixed rate.
- Collateral
- Assets pledged to secure a loan that a lender can claim on default. Common commercial collateral includes real estate, equipment, receivables, and inventory.
- Concentration Limit
- A cap on how much of a borrowing base may come from a single customer, often 15% to 25%. Protects the lender from over-reliance on one payer.
- Covenant
- A contractual condition in a loan agreement. Financial covenants require ratios such as minimum DSCR; affirmative and negative covenants dictate reporting and restrict actions like new debt.
- Cross-Collateralization
- Using one asset to secure multiple loans, or multiple assets to secure one loan. Increases lender protection and reduces borrower flexibility to sell or refinance individual assets.
D
- Debt Service
- The total principal and interest payments required on debt over a given period, usually annually.
- Debt Service Coverage Ratio (DSCR)
- Net operating income divided by annual debt service. Most commercial lenders require at least 1.20x, meaning income covers payments 1.2 times over.
- Debt Yield
- Net operating income divided by the loan amount, expressed as a percentage. A lender's protection against low cap rates inflating value; 9% to 10% minimums are common.
- Draw
- An advance of funds taken from an available line of credit or construction facility. Construction draws are typically released against inspected completed work.
E
- Equipment Financing
- A loan or lease used to acquire business equipment, with the equipment itself serving as collateral and the term matched to its useful life.
F
- Factor Rate
- A flat multiplier used to price merchant cash advances instead of an interest rate. A 1.30 factor rate on $50,000 requires $65,000 in total remittance regardless of speed of repayment.
- Factoring
- The sale of accounts receivable to a third party at a discount for immediate cash. The factor typically collects directly from your customers.
- FICO SBSS
- The FICO Small Business Scoring Service score, from 0 to 300, blending personal credit, business credit, and financials. SBA lenders often prescreen at 155 or above.
G
- Guaranty Fee
- A fee charged by the SBA to guarantee a portion of a loan, typically 2% to 3.75% of the guaranteed amount, usually financed into the loan.
H
- Hard Money Loan
- Short-term financing from a private lender secured primarily by real estate value, priced higher than institutional debt in exchange for speed and flexible underwriting.
- Holdback
- The portion of an invoice or daily sales retained by a funder until final settlement. In factoring it is the reserve released after the customer pays.
I
- Interest-Only Payment
- A payment covering interest without reducing principal. Common on bridge loans and construction financing to minimize carrying cost during a project.
- Inventory Financing
- Borrowing secured by inventory on hand or on order, used to fund seasonal buildups, bulk purchases, or supplier deposits.
L
- Letter of Intent (LOI)
- A non-binding document outlining the principal terms of a proposed transaction such as a business acquisition. Lenders generally require a signed LOI before underwriting.
- Loan-to-Cost (LTC)
- The loan amount divided by total project cost, including purchase price and construction or renovation budget. Used on ground-up and value-add projects.
- Loan-to-Value (LTV)
- The loan amount divided by appraised value. Conventional commercial real estate typically caps at 65% to 80% depending on asset class.
M
- Merchant Cash Advance (MCA)
- The purchase of a fixed amount of future business revenue at a discount, repaid through daily or weekly remittances tied to sales. Not legally a loan.
N
- Net Operating Income (NOI)
- Property revenue minus operating expenses, before debt service and capital expenditures. The basis for DSCR, cap rate, and debt yield calculations.
- Non-Recourse Loan
- A loan where the lender's remedy on default is limited to the pledged collateral, with no general claim against the borrower personally, subject to standard carve-outs.
- Notification Factoring
- A factoring arrangement in which customers are told to remit payment to the factor. Non-notification programs keep the arrangement confidential.
O
- Origination Fee
- An upfront fee for processing and funding a loan, typically 1% to 5% of the loan amount, often deducted from proceeds at closing.
- Owner-Occupied Property
- Commercial real estate in which the borrower's operating business occupies a majority of the space — at least 51% for SBA eligibility.
P
- Personal Guarantee
- A commitment by an owner to repay business debt personally if the business defaults. Standard for owners holding 20% or more of a small business borrower.
- Prepayment Penalty
- A fee for retiring a loan early. SBA loans over 15 years carry a declining penalty in years one through three; commercial mortgages may use step-downs, yield maintenance, or defeasance.
- Purchase Order (PO) Financing
- Funding that pays a supplier directly against a confirmed customer purchase order, enabling a business to fulfill orders larger than its cash position allows.
R
- Recourse Loan
- A loan where the lender can pursue the borrower's and guarantors' other assets beyond the pledged collateral if a default leaves a deficiency.
- Refinance
- Replacing existing debt with new debt, typically to lower the rate or payment, extend the term, consolidate obligations, or extract equity through a cash-out.
- Reserve
- Funds held back by a lender or factor — either the unadvanced portion of an invoice or a required liquidity cushion held post-closing.
- Revolving Facility
- A credit line that replenishes as balances are repaid, allowing repeated draws up to a limit for the life of the facility.
S
- SBA 504 Loan
- An SBA program for owner-occupied real estate and heavy equipment, structured as a bank first mortgage plus a fixed-rate CDC debenture, often with 10% borrower equity.
- SBA 7(a) Loan
- The SBA's flagship and most flexible program, up to $5 million, usable for working capital, equipment, inventory, acquisitions, debt refinance, and owner-occupied real estate.
- SBA Express
- An expedited SBA program with a smaller maximum loan amount, delegated lender authority, and faster turnaround than standard 7(a).
- SBA Franchise Directory
- The SBA's list of franchise brands reviewed for program eligibility. Listed brands move through SBA underwriting materially faster.
- Seasoning
- The length of time a condition has existed — how long a property has been owned, a lease in place, or a tax lien on a payment plan. Many programs impose minimums.
- Section 179 Deduction
- A U.S. tax provision allowing businesses to deduct the cost of qualifying equipment in the year it is placed in service rather than depreciating it over time.
- Seller Note
- Financing provided by the seller of a business as part of the purchase price. On SBA deals a note on full standby can count toward the buyer's required equity injection.
- Spot Factoring
- Factoring individual selected invoices rather than the whole ledger. More flexible, generally priced higher than a whole-turn program.
- Stacking
- Taking multiple short-term advances or loans simultaneously. Compounds daily remittances and is a leading cause of small business cash flow failure.
- Standby Agreement
- An agreement subordinating a debt — commonly a seller note — so no payments are made until senior debt conditions are satisfied.
- Subordination
- The ranking of one creditor's claim behind another's. Senior lenders are repaid first from collateral proceeds; subordinated lenders accept more risk for more return.
T
- Term Loan
- A loan disbursed as a lump sum and repaid over a fixed schedule of payments. Contrasts with a revolving line of credit.
- Time in Business (TIB)
- How long a business has operated, measured from formation or first revenue. Six months opens alternative programs; two years opens most bank and SBA programs.
U
- UCC-1 Financing Statement
- A public filing that perfects a lender's security interest in business personal property, establishing lien priority against other creditors.
- Underwriting
- The lender's evaluation of credit risk — analyzing cash flow, credit, collateral, industry, and management to decide whether and how to approve a request.
- Use of Proceeds
- The stated purpose of loan funds. SBA and bank programs restrict eligible uses; most working capital products allow any legitimate business purpose.
W
- Working Capital
- Current assets minus current liabilities — the liquidity available to fund day-to-day operations such as payroll, inventory, and supplier payments.
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