Business Financing Glossary
Understand the terms and concepts behind business financing. Plain English definitions for every term you need to know.
A
Amortization
The process of spreading loan payments over time. Each payment includes both principal and interest, gradually paying down the balance.
Annual Percentage Rate (APR)
The total yearly cost of borrowing expressed as a percentage. APR includes interest plus fees, giving you a complete picture of what a loan costs.
Accounts Receivable
Money owed to your business by customers for goods or services already delivered. AR can be used as collateral or sold through invoice factoring.
Advance Rate
The percentage of an invoice or asset value that a lender will fund upfront. In invoice factoring, advance rates typically range from 80-90%.
B
Bank Statement Loan
A type of business loan where approval is based on bank statement deposits rather than tax returns or financial statements.
Bridge Loan
Short-term financing used to cover immediate needs while waiting for longer-term funding or a specific event like a property sale.
Business Credit Score
A numerical rating (typically 0-100) that represents your business creditworthiness based on payment history, credit usage, and public records.
C
Collateral
An asset pledged to secure a loan. If you default, the lender can seize the collateral. Not all business loans require collateral.
Cash Flow
The net amount of cash moving in and out of your business. Positive cash flow means more money coming in than going out.
Credit Line
A revolving credit facility that lets you borrow up to a set limit, repay, and borrow again without reapplying. Also called a line of credit.
D
Debt Service Coverage Ratio (DSCR)
A measure of whether your business generates enough income to cover its debt payments. DSCR = Net Operating Income / Total Debt Service.
Default
Failure to meet the terms of a loan agreement, typically by missing payments. Default can trigger penalties and damage your credit.
Draw
The act of accessing funds from an approved line of credit. You only pay interest on the amount you draw.
E
Equipment Financing
A loan or lease specifically for purchasing business equipment. The equipment itself typically serves as collateral for the loan.
Equity Financing
Raising capital by selling ownership shares in your business. Unlike debt financing, you do not repay equity but you give up partial ownership.
F
Factor Rate
A decimal figure (like 1.2 or 1.4) multiplied by your advance amount to determine total repayment. A $100K advance at 1.3 factor rate means you repay $130K.
Factoring
Selling your unpaid invoices to a factoring company at a discount for immediate cash. Also called invoice factoring or accounts receivable factoring.
Fixed Rate
An interest rate that stays the same throughout the life of the loan, providing predictable monthly payments.
G
Guarantor
A person who agrees to be responsible for repaying a loan if the borrower defaults. Many business loans require a personal guarantee from the owner.
Grace Period
A set time after a payment due date during which you can pay without penalty. Not all loans include a grace period.
I
Interest Rate
The percentage charged by a lender for borrowing money, expressed as an annual percentage of the outstanding balance.
Invoice Factoring
Selling unpaid B2B invoices to a factoring company for immediate cash, typically receiving 80-90% of the invoice value upfront.
L
Lien
A legal claim on an asset used as collateral for a loan. A UCC lien on business assets is common in business lending.
Line of Credit
A flexible borrowing arrangement where you can draw funds up to an approved limit, repay, and draw again as needed.
Loan-to-Value (LTV)
The ratio of a loan amount to the value of the asset being financed. Lower LTV ratios typically mean better terms.
M
Merchant Cash Advance (MCA)
A lump sum of capital provided in exchange for a percentage of future daily credit and debit card sales.
Maturity Date
The date when a loan must be fully repaid. At maturity, any remaining balance plus interest is due.
P
Personal Guarantee
A legally binding agreement where a business owner agrees to be personally liable for business debt if the business cannot repay.
Prepayment Penalty
A fee charged by some lenders if you pay off a loan before its scheduled maturity date. Many alternative lenders do not charge this.
Principal
The original amount of money borrowed, not including interest or fees. Monthly payments reduce the principal balance over time.
R
Revenue Based Financing
Funding where repayment is tied to a percentage of your monthly revenue. Payments adjust automatically based on your sales volume.
Revolving Credit
A credit facility that replenishes as you repay. A business line of credit is the most common type of revolving credit.
S
SBA Loan
A loan partially guaranteed by the U.S. Small Business Administration. SBA loans offer lower rates and longer terms than conventional business loans.
Secured Loan
A loan backed by collateral such as equipment, real estate, or inventory. Secured loans typically offer better rates than unsecured loans.
Soft Credit Pull
A credit inquiry that does not affect your credit score. Many alternative lenders use soft pulls for initial qualification checks.
T
Term Loan
A loan with a fixed repayment schedule over a set period (the term). Payments are typically made monthly and include principal plus interest.
Total Cost of Capital
The complete cost of borrowing including interest, fees, and any other charges. Compare this across offers to find the best deal.
U
UCC Filing
A Uniform Commercial Code filing that gives a lender a legal interest in your business assets. Common in business lending as a form of security.
Unsecured Loan
A loan that does not require collateral. Approval is based on creditworthiness and business performance rather than pledged assets.
Underwriting
The process a lender uses to evaluate your application, assess risk, and determine loan terms. This includes reviewing financials, credit, and business history.
W
Working Capital
The cash available for day-to-day business operations. Calculated as current assets minus current liabilities.
Working Capital Loan
Short-term financing used to cover everyday business expenses like payroll, rent, inventory, and supplies.
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