Reference
Business financing glossary
The vocabulary of commercial credit, defined without the circularity. Terms that appear in loan documents and cost people money when misunderstood get the longest entries.
A
B
- Balloon payment
- A large lump sum due at the maturity of a loan that has not fully amortised.
C
- CDFI
- A Community Development Financial Institution, certified by the U.S. Treasury.
- Certified Development Company
- A non-profit licensed by the SBA to deliver the 504 programme in a defined region.
- Charge-off
- A lender's recognition that a loan will not be repaid, written off against reserves.
- Collateral
- Assets pledged to secure a loan.
- Commercial Finance Disclosure Law
- State laws requiring standardised cost disclosures on commercial financing below a threshold.
- Confession of judgment
- A contractual clause allowing a creditor to obtain judgment without a hearing.
D
- Debt service coverage ratio
- Adjusted cash flow divided by total debt service - the first number an underwriter calculates.
E
- EBITDA
- Earnings before interest, taxes, depreciation, and amortisation.
- Equity injection
- The borrower's own money contributed to a project, expressed as a percentage of total project cost.
F
- Factor rate
- A multiplier used to price merchant cash advances - not an interest rate and not comparable to one.
G
- Guarantee fee
- A fee the SBA charges on the guaranteed portion of a 7(a) loan.
I
- Invoice factoring
- Selling unpaid invoices to a third party at a discount for immediate cash.
L
- Loan broker
- A person or firm that arranges financing for a borrower in exchange for compensation.
M
- Merchant cash advance
- The purchase of a business's future receivables at a discount, repaid from daily or weekly receipts.
N
- NAICS code
- The North American Industry Classification System code identifying a business's industry.
O
- Owner-occupied
- Property where the borrowing business occupies a majority of the space.
P
- Personal guarantee
- A promise by an individual to repay business debt personally if the business does not.
- Preferred Lender Program
- SBA authority allowing a lender to make the credit decision itself without agency review.
- Prime rate
- The base rate most variable-rate SBA 7(a) loans are pegged to.
R
- Recourse factoring
- Factoring where the business must buy back an invoice the customer does not pay.
- Revenue-based financing
- Capital repaid as a fixed percentage of monthly revenue until a set multiple is delivered.
S
- SBA 504
- Long-term fixed-rate financing for owner-occupied real estate and heavy equipment.
- SBA 7(a)
- The SBA's flagship loan guarantee programme, up to $5 million.
- SBA Express
- A 7(a) variant with a 50% guarantee, the lender's own forms, and a 36-hour SBA response.
- SDE
- Seller's discretionary earnings - net profit plus owner compensation and discretionary expenses.
- Seller note
- Financing provided by the seller of a business as part of the purchase price.
- Size standard
- The SBA's threshold, by NAICS code, for what counts as a small business.
- SSBCI
- The State Small Business Credit Initiative - federal capital deployed through state programmes.
- Stacking
- Taking a second or third merchant cash advance while an earlier one is still outstanding.
- Standby agreement
- A written agreement that a subordinate lender - usually a seller - will take no payments while the SBA loan is outstanding.
T
- Total project cost
- Everything a loan funds: purchase price, working capital, closing costs, and fees.
U
- UCC-1 lien
- A public filing that records a lender's security interest in business assets.
W
- Working capital
- The cash a business needs to fund its operating cycle between paying suppliers and being paid.