Business Loan Glossary: 50+ Terms Explained

Accounts Receivable (A/R)

Money owed to your business by customers for goods or services already delivered. A/R can serve as collateral for financing.

Example: A contractor who completed a $50,000 job and is waiting 30 days for payment has $50,000 in A/R.

Amortization

The process of spreading loan payments over a fixed schedule so both principal and interest are paid down over time. Fully amortizing loans have no balloon payment at the end.

Annual Percentage Rate (APR)

The annualized cost of borrowing expressed as a percentage, including interest and fees. APR is the best way to compare the true cost of different loan products.

Example: A loan with a 10% interest rate and 3% origination fee has an APR higher than 10%.

Balloon Payment

A large lump-sum payment due at the end of a loan term after a period of smaller regular payments. Common in commercial real estate loans.

Blanket Lien

A type of UCC filing that gives the lender a security interest in all of your business assets — not just a specific piece of equipment or property.

Bridge Loan

A short-term loan designed to provide temporary financing until longer-term funding is secured. Often used in real estate transactions or acquisition financing.

Business Credit Score

A score assigned to your business (separate from personal credit) by agencies like Dun & Bradstreet, Experian Business, and Equifax Business. Ranges and scales vary by agency.

Capital Stack

The total structure of financing used for a business or project, including equity, senior debt, mezzanine debt, and other layers of capital.

Collateral

An asset pledged to a lender to secure a loan. If you default, the lender can seize the collateral. Common types include equipment, real estate, inventory, and accounts receivable.

Example: A $100,000 equipment loan secured by the equipment being purchased.

Confession of Judgment

A legal clause sometimes included in MCA agreements that allows the lender to obtain a court judgment against you without a trial if you default. Banned in some states for consumer loans.

Covenant

A condition or requirement written into a loan agreement that the borrower must comply with. Positive covenants require you to do something (maintain insurance); negative covenants restrict actions (no additional debt).

Debt Service Coverage Ratio (DSCR)

A measure of your business's ability to repay debt. Calculated as net operating income divided by total annual debt payments. Lenders typically want a DSCR of 1.25 or higher.

Example: If your NOI is $125,000 and annual debt payments are $100,000, your DSCR is 1.25.

Debt-to-Income Ratio (DTI)

The percentage of your gross monthly income that goes toward debt payments. Both personal and business DTI are evaluated in lending decisions. Lower is better.

Default

Failure to meet the obligations of a loan agreement — most commonly, missing payments. Default triggers consequences including late fees, accelerated repayment, and potential seizure of collateral.

Draw (Line of Credit)

The act of borrowing money from an available line of credit. You only pay interest on the amount you draw, not the full credit limit.

Equipment Financing

A loan or lease specifically for purchasing business equipment, where the equipment itself serves as collateral. Terms typically range from 2-7 years.

Factor Rate

A decimal multiplier used to calculate the total repayment amount on merchant cash advances and some short-term loans. Multiply the advance amount by the factor rate to get the total owed.

Example: A $50,000 advance with a factor rate of 1.30 means you repay $65,000 total.

Factoring (Invoice Factoring)

Selling your outstanding invoices to a third party (the factor) at a discount in exchange for immediate cash. The factor then collects payment from your customers.

FICO Score

A personal credit score developed by Fair Isaac Corporation, ranging from 300 to 850. Most business lenders look at the primary owner's personal FICO score in addition to business financials.

Fixed Rate

An interest rate that remains the same for the entire loan term, providing predictable payments. Contrast with variable rate.

Guaranty (Personal Guarantee)

A promise by the business owner to personally repay the loan if the business cannot. Most small business loans require a personal guarantee from owners with 20%+ ownership.

Hardship Deferment

A temporary pause or reduction in loan payments granted by the lender during a period of financial difficulty. Not all lenders offer this option.

Interest Rate

The percentage charged on the principal balance of a loan, expressed annually. The interest rate does not include fees — APR provides a more complete cost picture.

Invoice Financing

An umbrella term for funding options that use your outstanding invoices as collateral or as assets to sell. Includes both invoice factoring and invoice-backed lines of credit.

Line of Credit (LOC)

A revolving credit facility that allows you to borrow up to a set limit, repay, and borrow again. Interest accrues only on the amount drawn. More flexible than a term loan.

Loan-to-Value Ratio (LTV)

The ratio of the loan amount to the appraised value of the collateral. A $400,000 loan on a $500,000 property has an LTV of 80%. Lower LTV means lower risk for the lender.

Maturity Date

The date by which a loan must be fully repaid. After this date, any remaining balance may be subject to penalties or renegotiation.

Merchant Cash Advance (MCA)

A lump sum of capital provided in exchange for a percentage of future credit card or debit card sales. Technically not a loan — it is a purchase of future receivables. MCAs are typically the most expensive form of business financing.

Mezzanine Financing

A hybrid of debt and equity financing that gives the lender the right to convert to ownership if the loan is not repaid. Fills the gap between senior debt and equity in the capital stack.

Net Operating Income (NOI)

Total revenue minus operating expenses, excluding taxes and interest. NOI measures a business's core profitability and is used to calculate DSCR.

Origination Fee

A one-time fee charged by the lender for processing a new loan, typically 1-5% of the loan amount. Origination fees increase the effective APR of the loan.

Prepayment Penalty

A fee charged if you pay off a loan before the scheduled maturity date. Not all loans have prepayment penalties — some lenders actually offer early payoff discounts.

Prime Rate

The interest rate that commercial banks charge their most creditworthy customers. SBA loan rates are expressed as Prime + a margin. As of March 2026, the Prime Rate is approximately 8.50%.

Example: An SBA loan at Prime + 2.75% would carry a rate of approximately 11.25%.

Principal

The original amount of money borrowed, excluding interest and fees. Your payment is split between principal repayment and interest charges.

Recourse Loan

A loan where the lender can pursue the borrower's personal assets (beyond the collateral) if the loan defaults. Most small business loans are recourse loans.

Refinancing

Replacing an existing loan with a new loan, typically at a lower interest rate or better terms. Business refinancing can reduce monthly payments or consolidate multiple debts.

Revolving Credit

A type of credit that replenishes as you repay it. Business lines of credit and credit cards are revolving credit products. Contrast with a term loan, which is disbursed once.

SBA 7(a) Loan

The SBA's most common loan program, providing up to $5 million for working capital, equipment, real estate, and business acquisition. The SBA guarantees a portion of the loan, reducing lender risk.

SBA 504 Loan

An SBA loan program for purchasing fixed assets like real estate or major equipment. Involves a partnership between a bank (50%), a Certified Development Company (40%), and the borrower (10% down payment).

SBA Express Loan

A faster-processing SBA loan with a 36-hour SBA turnaround guarantee. Maximum amount is $500,000 with up to 50% SBA guarantee (vs. 75-85% for standard 7(a)).

SBA Microloan

An SBA program providing loans up to $50,000 through community-based nonprofit lenders. Designed for startups and underserved borrowers. Average microloan is approximately $13,000.

Secured Loan

A loan backed by collateral. If you default, the lender can seize the pledged asset. Secured loans typically offer lower rates than unsecured loans because the lender's risk is reduced.

Term Loan

A lump-sum loan repaid in fixed installments over a set period (the "term"). Terms for business loans range from 3 months to 25 years depending on the product and use of funds.

Time in Business

How long your business has been operating, measured from the date of incorporation or first revenue. Most lenders require 6-24 months minimum. Longer history generally means better terms.

UCC Filing (UCC-1)

A Uniform Commercial Code filing that establishes a lender's security interest in your business assets. Filed with the state and publicly visible. Multiple UCC filings on a business indicate multiple secured debts.

Underwriting

The process a lender uses to evaluate your loan application and determine risk. Underwriters review credit, revenue, collateral, industry, and business plan to decide approval and terms.

Unsecured Loan

A loan that does not require collateral. Approval is based on creditworthiness and business financials alone. Unsecured loans typically carry higher interest rates to compensate for the lender's higher risk.

Variable Rate

An interest rate that fluctuates based on a benchmark rate (usually Prime or SOFR). Your payments can increase or decrease as the benchmark changes. SBA 7(a) loans use variable rates.

Working Capital

The cash available for day-to-day operations, calculated as current assets minus current liabilities. Working capital loans provide funds to cover operational expenses like payroll, rent, and inventory.

Working Capital Loan

A loan specifically designed to fund daily business operations rather than long-term investments. Typically shorter-term (3 months to 3 years) with faster approval than real estate or equipment loans.