Loan and Finance Terms
Whether you’re new to business finance or looking to sharpen your understanding,
this glossary will help clarify the essential terms you’ll encounter
in business loans and financing.
Accounts Receivable (AR): Money owed to a business by its customers for goods or services already delivered but not yet paid for. Often used as collateral for certain types of financing.
Accounts Receivable Financing (Invoice Financing): A type of asset-financing arrangement in which a company uses its accounts receivables as collateral to obtain a loan or sells them at a discount to get immediate cash.
Accrued Interest: Interest that has been incurred but not yet paid.
Acquisition Loan: A loan used specifically to finance the purchase of another business.
Adjustable-Rate Loan (Variable-Rate Loan): A loan where the interest rate can change periodically based on an underlying benchmark index.
Amortization: The process of gradually paying off a loan over time through scheduled installments that include both principal and interest.
Amortization Schedule: A table detailing each periodic payment on a loan, showing how much of each payment is applied to principal and how much to interest, and the remaining balance after each payment.
Annual Percentage Rate (APR): The total annual cost of a loan to a borrower, including interest and all fees, expressed as a percentage.
Appraisal: A professional, unbiased estimate of the fair market value of a property or other asset. Required for most real estate loans.
Appreciation: An increase in the value of an asset over time.
Arrears: The state of being behind on one or more loan payments.
Asset: Anything of monetary value owned by a business or individual (e.g., cash, equipment, property, accounts receivable).
Asset-Based Lending: A type of loan where the amount borrowed is secured by a company’s assets, such as accounts receivable, inventory, or equipment.
Automated Clearing House (ACH): An electronic network for financial transactions in the United States, often used for direct deposit of loan funds or automatic loan payments.
Balance Sheet: A financial statement that provides a snapshot of a company’s assets, liabilities, and equity at a specific point in time.
Balloon Payment: A large, lump-sum payment due at the end of a loan term, typically for loans that are not fully amortized.
Bankruptcy: A legal process for individuals or businesses that cannot repay their outstanding debts.
Basis Point (BPS): One-hundredth of one percentage point (0.01%). Used to describe changes in interest rates or fees. (e.g., 50 BPS = 0.50%).
Blanket Lien: A lien that gives a lender a security interest in all of a borrower’s assets, rather than a specific asset.
Borrower: The individual or business entity receiving a loan.
Bridge Loan: A short-term loan used to “bridge” a gap until a longer-term financing option or expected cash inflow becomes available. Often used in real estate.
Business Acquisition: The process of purchasing an existing business.
Business Credit Report: A detailed report of a business’s credit history, including payment history, debts, and public records.
Business Line of Credit: A flexible financing option that allows a business to draw funds up to a certain limit as needed and pay interest only on the amount borrowed.
Business Plan: A formal document outlining a company’s goals, strategies, market analysis, and financial projections. Often required for loan applications, especially for startups or expansions.
Cap Rate (Capitalization Rate): Used in commercial real estate, it is the rate of return expected on a real estate investment property based on the income the property is expected to generate. (Net Operating Income / Current Market Value).
Capital: Financial assets or the financial value of assets, such as cash or goods.
Capital Expenditures (CapEx): Funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, technology, or equipment.
Cash Flow: The total amount of money being transferred into and out of a business, especially as affecting liquidity.
Cash Flow Statement: A financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities.
Closing: The final step in a loan transaction where documents are signed, funds are disbursed, and ownership (if applicable) is formally transferred.
Closing Costs: Fees associated with the completion of a real estate or loan transaction, including appraisal fees, title insurance, legal fees, and loan origination fees.
Co-signer (or Guarantor): An individual who agrees to be legally responsible for repaying a loan if the primary borrower defaults.
Collateral: Specific asset(s) pledged by a borrower to a lender as security for a loan. If the borrower defaults, the lender can seize the collateral.
Commercial Loan: A loan extended to a business by a financial institution, typically used for business operations, expansion, or to purchase commercial real estate.
Commercial Mortgage: A loan secured by a commercial property (e.g., office building, retail space, industrial warehouse).
Commitment Fee: A fee charged by a lender for an agreement to make a loan at some future date.
Commitment Letter: A formal document from a lender stating its intention to grant a loan under specific terms and conditions.
Compound Interest: Interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods on a deposit or loan.
Construction Loan: A short-term loan used to finance the building or substantial renovation of a property. Funds are typically disbursed in draws as construction progresses.
Credit Bureau: A company that collects and maintains information about individuals’ and businesses’ credit histories and sells it to lenders in the form of credit reports (e.g., Experian, Equifax, TransUnion).
Credit Enhancement: A strategy for improving the credit profile of a borrower or a debt issue, often to obtain better loan terms.
Credit History: A record of a borrower’s responsible repayment of debts.
Credit Line (Line of Credit): See Business Line of Credit.
Credit Report: A detailed breakdown of an individual’s or company’s credit history prepared by a credit bureau.
Credit Score: A numerical representation of a borrower’s creditworthiness, based on their credit history. Lenders use this to assess risk.
Creditworthiness: A lender’s assessment of a borrower’s ability and willingness to repay debt.
Crowdfunding: Raising small amounts of money from many people, typically via the internet.
Debt: An amount of money borrowed by one party from another.
Debt Consolidation: Combining multiple debts into a single, new loan, often to achieve a lower interest rate or a more manageable payment.
Debt Service: The total cash required to cover the repayment of interest and principal on a debt for a given period.
Debt Service Coverage Ratio (DSCR): A measure of a property’s or business’s available cash flow to pay current debt obligations (principal and interest). Calculated as Net Operating Income / Total Debt Service. A ratio above 1 indicates positive cash flow to cover debt.
Debt-to-Equity Ratio (D/E Ratio): A financial leverage ratio that compares a company’s total liabilities to its shareholder equity. Used to evaluate a company’s financial leverage.
Debt-to-Income Ratio (DTI): A personal finance measure that compares an individual’s monthly debt payments to their monthly gross income. While more common in personal lending, it can influence personal guarantees on business loans.
Default: Failure to meet the legal obligations (or conditions) of a loan, most often failing to make timely payments.
Deferment: A temporary postponement of loan payments. Interest may or may not accrue during this period, depending on the loan terms.
Delinquency: The state of being overdue on a loan payment.
Depreciation: A decrease in the value of an asset over time due to wear and tear, age, or obsolescence.
Down Payment: The initial upfront portion of the total cost of a purchase, paid in cash at the time of the transaction. The remaining amount is typically financed.
Draw: A disbursement of funds from a loan, especially common with lines of credit or construction loans.
Due Diligence: The process of investigation and analysis performed by investors or lenders before making a financial decision.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): A measure of a company’s overall financial performance and is used as an alternative to net income in some circumstances.
Encumbrance: A claim against a property by a party that is not the owner (e.g., a mortgage, lien, or easement).
Entrepreneur: An individual who organizes and operates a business or businesses, taking on greater than normal financial risks to do so.
Equipment Financing/Lease: A loan or lease used specifically for the purchase of business equipment. The equipment itself usually serves as collateral.
Equity:
In Business: The ownership interest in a company, representing the amount of money that would be returned to a company’s shareholders if all of the assets were liquidated and all of the company’s debt was paid off.
In Real Estate: The difference between the property’s current market value and the outstanding mortgage balance.
Escrow: An account held by a third party on behalf of two other parties in a transaction. Often used for property taxes and insurance in mortgage payments.
Exit Strategy: A plan for how an investor or business owner intends to get out of an investment or business, either to cash out or to limit losses.
Fair Market Value (FMV): The price an asset would sell for on the open market when both buyer and seller are knowledgeable, willing, and not under undue pressure.
Factoring (Invoice Factoring): A financial transaction where a business sells its accounts receivable (invoices) to a third party (a factor) at a discount to get immediate cash.
FICO Score: A type of credit score created by the Fair Isaac Corporation. Lenders use these scores to make decisions about credit approvals, terms, and interest rates.
Fiduciary: An individual or institution legally obligated to act in the best interests of another party.
Financial Statements: Formal records of the financial activities and position of a business, person, or other entity. Key statements include the balance sheet, income statement, and cash flow statement.
Financing: The act of providing funds for business activities, making purchases, or investing.
Fixed Assets: Long-term tangible property that a firm owns and uses in its operations to generate income (e.g., buildings, machinery, land).
Fixed Interest Rate: An interest rate on a loan that remains the same for the entire term of the loan.
Forbearance: A temporary postponement or reduction of loan payments agreed upon by the lender, usually due to borrower hardship. Interest typically still accrues.
Foreclosure: A legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments by forcing the sale of the asset used as collateral.
Franchise Financing: Loans specifically designed to help entrepreneurs purchase and operate a franchise business.
Fully Amortized Loan: A loan where the scheduled periodic payments consist of both principal and interest, and the loan is fully paid off by the end of the term.
Grace Period: A set number of days after a loan payment’s due date during which payment may be made without penalty.
Gross Profit: The profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services. (Revenue – Cost of Goods Sold).
Ground-Up Construction Loan: Financing specifically for building a new structure from the foundation up.
Guarantee (Personal Guarantee): A legal promise by an individual (often a business owner) to personally repay a business loan if the business defaults.
Guarantor: The person or entity that provides a guarantee.
Hard Money Loan: A short-term loan secured by real estate, typically funded by private investors rather than conventional lenders. Often has higher interest rates and shorter terms but faster funding.
Income Statement (Profit and Loss Statement or P&L): A financial statement that reports a company’s financial performance over a specific accounting period, showing revenues, expenses, and resulting profit or loss.
Index: A statistical measure of change in a representative group of data points. Used as a benchmark for variable interest rates (e.g., Prime Rate, SOFR).
Installment Loan: A loan that is repaid over time with a set number of scheduled payments.
Interest: The cost of borrowing money, typically expressed as an annual percentage of the loan amount.
Interest-Only Loan: A loan where the borrower pays only the interest on the principal balance for a specified period. The principal is repaid either in a lump sum at the end or through an amortizing schedule later.
Interest Rate: The percentage of principal charged by the lender for the use of its money.
Inventory: The raw materials, work-in-process goods, and completely finished goods that are considered to be the portion of a business’s assets that are ready or will be ready for sale.
Inventory Financing: A loan or line of credit secured by a company’s inventory.
Investment Property: Real estate purchased with the intention of earning a return on the investment, either through rental income, future resale, or both.
Joint Venture: A business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task or project.
Landlord: The owner of property (such as land, houses, or apartments) that is leased or rented to another.
Lease: A contract by which one party conveys land, property, services, etc., to another for a specified time, usually in return for a periodic payment.
Leasehold Improvements: Modifications made to a leased space to configure it for the tenant’s specific business needs.
Lender: An individual, public or private group, or financial institution that makes funds available to another with the expectation that the funds will be repaid, along with any interest and/or fees.
Letter of Credit (LC): A letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. Often used in international trade.
Letter of Intent (LOI): A document outlining the main points of a proposed deal or agreement before a formal contract is finalized.
Leverage: Using borrowed capital to finance an investment, with the expectation that the profits made will be greater than the interest payable.
Liability: A company’s legal financial debts or obligations that arise during the course of its business operations.
Lien: A lender’s legal claim on a borrower’s asset(s) pledged as collateral until a loan is repaid.
Liquidity: The ease with which an asset, or security, can be converted into ready cash without affecting its market price. Also refers to a business’s ability to meet its short-term financial obligations.
Loan Agreement (Loan Contract): A legally binding contract between a borrower and a lender that outlines the terms and conditions of a loan.
Loan Application: A document or form a borrower must fill out to request a loan.
Loan Officer: A representative of a financial institution who assists borrowers in applying for loans and manages the loan process.
Loan Origination: The entire process of creating a new loan, from application through underwriting and funding.
Loan Origination Fee: A fee charged by a lender for processing a new loan application, often expressed as a percentage of the loan amount.
Loan Portfolio: The total collection of loans held by a financial institution or lender.
Loan Servicing: The administrative tasks associated with a loan, including collecting payments, managing escrow accounts, and handling customer service.
Loan Structuring: The process of designing a loan’s terms, conditions, and features to meet the specific needs of the borrower and the risk tolerance of the lender.
Loan Term: The period over which a loan is scheduled to be repaid.
Loan-to-Cost Ratio (LTC): A metric used in real estate construction and development financing to compare the amount of the loan to the total cost of the project (purchase price + development/rehab costs).
Loan-to-Value Ratio (LTV): A financial term used by lenders to express the ratio of a loan to the appraised value of an asset being purchased. (Loan Amount / Appraised Value).
Margin:
In Lending: An amount added to an index rate to determine the fully indexed interest rate for an adjustable-rate loan.
In Business: The difference between revenue and cost (e.g., gross profit margin).
Maturity Date: The date on which the final payment of a loan is due.
Merchant Cash Advance (MCA): A type of financing where a business receives a lump sum of cash in exchange for a percentage of its future credit/debit card sales or a fixed daily/weekly ACH withdrawal. Often has high effective interest rates.
Mezzanine Financing: A hybrid of debt and equity financing that gives the lender the right to convert to an equity interest in the company in case of default, generally after venture capital companies and other senior lenders are paid.
Microloan: A very small loan, often provided to startup companies or entrepreneurs in underserved communities or developing countries.
Mortgage: A loan used to purchase or maintain a home, land, or other types of real estate, where the property itself serves as collateral. (See Commercial Mortgage for business properties).
Multi-Family Property: A residential property that contains more than one housing unit, such as a duplex, triplex, fourplex, or apartment building.
Net Income (Net Profit): A company’s total earnings (or profit) after deducting all expenses, including taxes and interest. (Revenue – Total Expenses).
Net Operating Income (NOI): In real estate, it’s the income generated by a property after deducting all operating expenses but before deducting debt service (mortgage payments) and income taxes. (Gross Operating Income – Operating Expenses).
Net Worth: The total value of a company’s or individual’s assets minus their total liabilities.
Non-Dutch Interest: A method of calculating interest where interest is not charged on the rehab or construction holdback portion of a loan until those funds are actually disbursed.
Non-Recourse Loan: A loan where the lender can only seize the collateral specified in the loan agreement in the event of default and cannot pursue the borrower’s other assets. More common in large commercial real estate deals.
Operating Agreement (for LLCs): A key document that outlines the business’s financial and functional decisions including rules, regulations, and provisions.
Operating Expenses (OpEx): The ongoing costs a business incurs to engage in its normal business activities, excluding cost of goods sold (e.g., rent, utilities, salaries, marketing).
Origination: See Loan Origination.
Origination Fee: See Loan Origination Fee.
Owner-Occupied Commercial Real Estate: Commercial property where the owner’s business occupies at least 51% (or a specified percentage) of the usable space.
Partnership Agreement: A contract between partners in a partnership which sets out the terms and conditions of the relationship between the partners.
Peer-to-Peer (P2P) Lending: A method of debt financing that enables individuals to borrow and lend money directly between each other without the use of an official financial institution as an intermediary.
Personal Guarantee: See Guarantee.
PITI: Abbreviation for Principal, Interest, Taxes, and Insurance, which are the components of many monthly mortgage payments.
Points (Loan Points or Discount Points): Fees paid directly to the lender at closing in exchange for a reduced interest rate. One point equals 1% of the loan amount.
Portfolio Loan:
A loan that a lender keeps on its own books rather than selling it on the secondary market.
A single loan used to finance multiple properties.
Pre-Approval (or Pre-Qualification): An initial assessment by a lender of a borrower’s likely qualification for a loan, based on preliminary information. It’s not a final loan commitment.
Predatory Lending: Unfair or fraudulent lending practices that impose unfair or abusive loan terms on a borrower.
Prepayment: Paying off all or part of a loan before its scheduled maturity date.
Prepayment Penalty: A fee charged to a borrower who pays off a loan earlier than its scheduled maturity date.
Prime Rate: The interest rate that commercial banks charge their most creditworthy corporate customers. It serves as a benchmark for many other types of loans.
Principal: The original amount of money borrowed in a loan, excluding interest.
Private Equity: Investment funds, generally organized as limited partnerships, that buy and restructure companies that are not publicly traded.
Private Lender: An individual or non-bank company that provides loans, often for real estate or specialized business needs, typically with more flexible terms but potentially higher rates than traditional banks.
Pro Forma Financials: Financial statements that project future income, expenses, and overall financial performance based on certain assumptions.
Profit and Loss Statement (P&L): See Income Statement.
Promissory Note: A written, signed document containing an unconditional promise by one party (the maker or issuer) to pay a definite sum of money to another party (the payee) on demand or at a specified future date.
Proof of Funds (POF): A document that demonstrates that a person or entity has the ability and funds available for a specific transaction.
Property Tax: A tax assessed on real estate by the local government.
Purchase Agreement (Sale Agreement): A legally binding contract between a buyer and a seller outlining the terms and conditions for the sale of a property or business.
Qualification: The process of determining whether a borrower meets a lender’s criteria for a loan.
Rate Lock: A lender’s commitment to offer a specific interest rate for a defined period while a loan application is being processed.
Real Estate Owned (REO): Property owned by a lender, typically a bank, after an unsuccessful sale at a foreclosure auction.
Recourse Loan: A loan where, in the event of default, the lender can seize not only the collateral but also pursue the borrower’s other personal assets if the collateral’s sale doesn’t cover the outstanding debt. (Contrast with Non-Recourse Loan).
Refinancing: Replacing an existing loan with a new loan that has different terms, often to obtain a lower interest rate, change the loan term, or tap into equity.
Rehab (Rehabilitation) Loan: A loan used to finance the renovation or repair of a property.
Rent Roll: A document that details the rental income for a specific property. It lists tenants, unit numbers, lease terms (start/end dates), monthly rent, and security deposits.
Return on Investment (ROI): A performance measure used to evaluate the efficiency or profitability of an investment. (Net Profit / Cost of Investment) x 100%.
Revolving Line of Credit: A line of credit where the borrower can draw funds, repay them, and then draw them again up to the approved credit limit.
Risk Assessment: The process of identifying potential risks associated with a loan and evaluating their likelihood and potential impact.
SBA (Small Business Administration): A U.S. government agency that provides support to entrepreneurs and small businesses, including guaranteeing certain types of loans made by participating lenders.
SBA Loan: A loan program partially guaranteed by the SBA, often offering favorable terms for small businesses. Common types include 7(a) loans, 504 loans, and microloans.
Secured Loan: A loan backed by collateral, which the lender can seize if the borrower defaults.
Securitization: The process of pooling various types of debt instruments (e.g., mortgages) and selling them as bonds, pass-through securities, or other financial instruments to investors.
Security Agreement: A document that provides a lender a security interest in specified assets or property pledged as collateral.
Seed Capital (Seed Funding): Early-stage investment used to support a business idea before it generates revenue.
Seller Financing (Owner Financing): A loan provided by the seller of a property or business to the purchaser.
Senior Debt: Debt that takes priority over other unsecured or more “junior” debt owed by the issuer in the event of bankruptcy.
Single-Family Residence (SFR): A standalone residential structure designed for one family.
Soft Credit Check (Soft Pull): A type of credit inquiry that does not affect a person’s credit score. Often used for pre-qualification. (Contrast with Hard Credit Check).
Sole Proprietorship: A business owned and run by one person, where there is no legal distinction between the owner and the business.
Startup: A newly established business, typically in its early stages of development.
Subordinated Debt (Junior Debt): Debt that ranks below other, more senior loans or securities with respect to claims on assets or earnings.
Sweat Equity: Contribution to a project or enterprise in the form of effort and toil, rather than financial capital.
Tax ID Number (EIN – Employer Identification Number): A unique nine-digit number assigned by the Internal Revenue Service (IRS) to business entities operating in the United States for the purposes of identification.
Tax Lien: A legal claim placed on a property by a government entity due to unpaid taxes.
Tenant Improvements (TI): See Leasehold Improvements.
Term: The duration of a loan or lease.
Term Loan: A loan from a bank for a specific amount that has a specified repayment schedule and a fixed or floating interest rate.
Title: A legal document that establishes ownership of a property.
Title Insurance: Insurance that protects lenders and homebuyers from financial loss sustained from defects in a title to a property.
Trade Credit: An arrangement where a business allows another business to buy goods or services on account, paying for them at a later date.
Underwriting: The process a lender uses to assess the creditworthiness and risk of a potential borrower and to determine if a loan application should be approved.
Uniform Commercial Code (UCC) Filing: A legal notice filed with a state’s secretary of state or other designated office to publicly declare a lender’s security interest in a borrower’s specific personal property pledged as collateral.
Unsecured Loan: A loan that is not backed by any collateral. Approval is based primarily on the borrower’s creditworthiness.
Valuation: The process of determining the economic worth of a business or asset.
Variable Interest Rate: See Adjustable-Rate Loan.
Venture Capital (VC): Financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. This is often an equity investment.
Working Capital: The capital of a business which is used in its day-to-day trading operations, calculated as the current assets minus the current liabilities.
Working Capital Loan: A loan obtained to finance a company’s everyday operations, such as covering payroll, inventory, or accounts payable.
Workout Agreement: A mutual agreement between a lender and a delinquent borrower to renegotiate the terms of a loan to help the borrower avoid default.
Yield: The income return on an investment, such as the interest or dividends received from holding a particular security.