Finance jargon can make the borrowing process feel intentionally complicated. It isn't — but lenders do use precise language, and knowing what terms mean before you sit across from one changes the dynamic entirely. This glossary covers commercial lending terms, personal finance terms, and the core concepts that apply across both.
Use it as a reference before applying for funding, during negotiations, or whenever you encounter a term you don't recognize.
A
Accounts Receivable (AR) Money owed to your business by customers for goods or services already delivered. AR is commonly used as collateral in invoice financing and factoring deals.
Accounts Receivable Financing A funding arrangement where a lender advances cash against your outstanding invoices. You repay when your customers pay. Different from factoring — you retain ownership of the receivables.
Accrued Interest Interest that has accumulated on a loan but has not yet been paid. On some loan types (like deferred payment loans), accrued interest can capitalize — meaning it gets added to the principal.
Amortization The process of paying off a loan through scheduled payments over time. Each payment covers both interest and principal. Early payments are interest-heavy; later payments chip away more at principal.
Amortization Schedule A table showing each payment amount, how much goes toward interest, how much reduces principal, and the remaining balance after each payment.
Annual Percentage Rate (APR) The true annual cost of borrowing, expressed as a percentage. APR includes the interest rate plus fees, which makes it a better comparison tool than the interest rate alone. Required disclosure on most consumer and small business loans.
Annual Percentage Yield (APY) The effective annual return when compounding is factored in. More commonly used in savings and deposit accounts than in lending, but appears in some revolving credit contexts.
Application Fee A fee charged by some lenders simply to process your loan application. Not universal, and often a red flag on predatory products — reputable lenders typically don't charge upfront fees before you've received an offer.
Asset-Based Lending (ABL) Loans secured by specific business assets — inventory, equipment, receivables, or real estate. The lender's risk is tied to the asset value, not just your cash flow. Common for manufacturers, distributors, and retailers.
Assumable Mortgage A mortgage that can be transferred from the seller to the buyer, with the buyer taking over the remaining balance at the original interest rate. Rare in commercial contexts; more common in government-backed residential mortgages.
B
Balloon Payment A large lump-sum payment due at the end of a loan term. Loans with balloon payments have lower regular payments, but require you to refinance or pay a large amount at maturity. Common in commercial real estate.
Basis Point (bps) One-hundredth of one percent (0.01%). Used to describe changes in interest rates and fees. "The rate dropped 25 basis points" means it fell by 0.25%.
Blanket Lien A lien against all of a borrower's assets — not a specific asset. Common in MCA and many term loan agreements. Means the lender can claim any business asset if you default.
Borrower The individual or entity receiving the loan funds and assuming the obligation to repay.
Bridge Loan Short-term financing used to "bridge" a gap — typically until longer-term funding closes or an asset sells. Common in real estate acquisitions and business transactions. Higher rates reflect the short-term, high-speed nature.
Business Credit Score A creditworthiness rating assigned to a business entity (not the owner). Major agencies include Dun & Bradstreet (PAYDEX), Experian Business, and Equifax Business. Ranges and scoring models differ from personal credit.
Business Line of Credit A revolving credit facility — a set limit you can draw from, repay, and draw again. Interest accrues only on the outstanding balance. Common for managing cash flow gaps and working capital needs.
C
Capital Funds available for investment or operations. "Working capital" is money for day-to-day operations; "growth capital" is money for expansion; "equity capital" is ownership stakes rather than debt.
Capitalized Interest Interest that is added to the principal balance rather than paid currently. This increases the loan balance and means you pay interest on interest. Common in student loans and some deferred payment structures.
Cash Flow Money moving in and out of a business over a period. Lenders analyze cash flow to assess repayment ability. Positive cash flow doesn't always mean profitability — timing matters.
Collateral An asset pledged to secure a loan. If you default, the lender can seize and sell the collateral to recover their funds. Common collateral includes real estate, equipment, inventory, and receivables.
Commitment Fee A fee paid to a lender for reserving a line of credit or loan commitment, even if you don't fully draw on it. Common in construction loans and revolving credit facilities.
Compounding The process where interest earns interest. Relevant to revolving balances and some loan structures. The more frequently interest compounds (daily vs. monthly), the higher the effective cost.
Consumer Loan A loan issued to an individual for personal, family, or household purposes. Includes personal loans, auto loans, mortgages, and credit cards. Subject to different regulations than commercial loans (CFPB oversight, TILA disclosures).
Conventional Loan A loan not backed by a government agency (not SBA, FHA, VA, USDA). Typically has stricter qualification requirements but faster approval timelines.
Covenant A condition in a loan agreement — either something you must do (affirmative covenant) or something you're prohibited from doing (negative covenant). Examples: maintain a minimum DSCR, don't take on additional debt above a threshold, submit quarterly financials.
Credit Facility A broad term for any pre-approved borrowing arrangement — a line of credit, revolving credit, or term loan commitment with a lender.
Credit Score A numerical summary of creditworthiness. For personal borrowers, FICO scores range 300–850. For businesses, each bureau has its own scale. Lenders use scores to price risk and set rates.
Credit Utilization The percentage of available revolving credit currently in use. High utilization (above 30%) signals risk and depresses personal and business credit scores. Lenders review this when assessing revolving credit applications.
D
Debt-Service Coverage Ratio (DSCR) A key commercial lending metric. DSCR = Net Operating Income ÷ Total Debt Service. A DSCR above 1.0 means the business generates enough income to cover its debt payments. Most commercial lenders require 1.25 or higher.
Default Failure to meet the terms of a loan agreement — typically missing payments, but also covenant violations. Default triggers lender remedies: acceleration, collection, and seizure of collateral.
Deferred Payment An arrangement where loan payments are postponed for a period. Interest may or may not continue to accrue during deferment, depending on the loan type.
Depreciation The reduction in value of an asset over time. Important in asset-based lending (affects collateral value) and in underwriting (lenders add back depreciation when analyzing cash flow, since it's non-cash).
Draw Taking funds from a credit line or construction loan. You "draw" $50,000 from a $200,000 line of credit.
Due Diligence The verification process a lender conducts before approving a loan — reviewing financials, tax returns, bank statements, ownership structure, and collateral. More thorough for larger or more complex deals.
E
EBITDA Earnings Before Interest, Taxes, Depreciation, and Amortization. A proxy for operating cash flow, widely used in commercial underwriting. Lenders use EBITDA to determine how much debt a business can reasonably carry.
Effective Interest Rate The true cost of borrowing after accounting for compounding and fee structures. Often higher than the stated nominal rate.
Equipment Financing A loan or lease specifically for purchasing business equipment. The equipment itself typically serves as collateral, which allows for higher approval rates and lower rates than unsecured loans.
Equity Ownership value — the difference between what an asset is worth and what is owed on it. In real estate: property value minus mortgage balance. In business: assets minus liabilities.
Equity Injection The borrower's own capital contribution to a deal. Required by many SBA loan programs (typically 10–30% of the total project cost) to demonstrate skin in the game.
F
Factor Rate A pricing mechanism used in MCA and some short-term lending products. Instead of an interest rate, you're quoted a multiplier (e.g., 1.25). A $100,000 advance at a 1.25 factor rate means you repay $125,000 total. Factor rates don't compound, but the equivalent APR can be very high.
Factoring Selling your outstanding invoices to a third party (the factor) at a discount in exchange for immediate cash. The factor collects from your customers directly. Unlike AR financing, you sell — and lose control of — the receivables.
Fixed Rate An interest rate that does not change for the life of the loan. Provides payment predictability. Typically higher than initial variable rates but protects against rate increases.
Floating Rate See Variable Rate.
Forbearance A temporary pause or reduction in loan payments, typically granted during financial hardship. Interest usually continues to accrue.
Foreclosure The legal process by which a lender takes ownership of collateral (usually real estate) after the borrower defaults. Commercial foreclosure timelines vary by state.
Funding Request A borrower's application describing how much capital they need, what it's for, and the terms they're seeking. On FundScout, this is the document that gets matched to vetted lenders.
G
Gross Revenue Total revenue before any deductions. MCA lenders and some short-term lenders size offers as a multiple of monthly gross revenue, regardless of profitability.
Guarantee A legally binding promise by a third party (the guarantor) to repay a debt if the borrower defaults. Most business loans require a personal guarantee from the owner(s).
Guaranteed Loan A loan where repayment is partially guaranteed by a government agency (e.g., SBA loans are partially guaranteed by the U.S. Small Business Administration). The guarantee reduces lender risk and enables better borrower terms.
H
Hard Pull (Hard Inquiry) A credit check that appears on the borrower's credit report and can lower their score. Lenders do hard pulls during formal underwriting. Multiple hard pulls in a short window (rate shopping) are usually treated as a single inquiry by scoring models.
HELOC (Home Equity Line of Credit) A revolving credit line secured by the equity in a residential property. Often used by small business owners to fund their businesses. Interest is typically variable.
Home Equity Loan A fixed-rate lump-sum loan secured by home equity. Unlike a HELOC, you receive all funds at once and repay on a fixed schedule.
I
Invoice Financing Borrowing against the value of unpaid invoices without selling them. You retain ownership of the receivables and collect payment from customers directly. See also: Accounts Receivable Financing.
Invoice Factoring See Factoring. Distinct from invoice financing — in factoring, you sell the invoices outright.
Interest Rate The percentage of the principal charged by the lender for use of funds, typically expressed as an annual rate. Does not include fees — see APR for the full cost picture.
Interest Rate Cap In variable-rate loans, the maximum rate the lender can charge regardless of market movements. Provides a ceiling on worst-case payment exposure.
L
Lead In commercial lending marketplaces, a potential borrower whose request has been evaluated and forwarded to lenders for review. Lead quality determines the marketplace's reputation — which is why FundScout reviews every request before matching.
Lender The party providing the loan funds. Can be a bank, credit union, non-bank lender, CDFI, hard money lender, or online marketplace lender.
Letter of Intent (LOI) A non-binding document summarizing the key terms of a proposed financing deal. Precedes formal commitment letters and closing documents.
Leverage The use of borrowed money to amplify investment or business capacity. High leverage means a lot of debt relative to equity. Lenders assess leverage ratios to gauge risk.
Lien A legal claim against an asset used as collateral. The lienholder must be paid before the asset can be sold free and clear. UCC filings are the standard mechanism for commercial loan liens.
Line of Credit A flexible borrowing arrangement with a set limit. Draw what you need, repay, and borrow again. Interest accrues only on the outstanding balance. Can be secured or unsecured, revolving or non-revolving.
Loan-to-Value (LTV) Loan amount ÷ Appraised value of collateral. A $700,000 loan on a $1,000,000 property = 70% LTV. Lower LTV = less lender risk = better rate.
Loan Officer A lender employee who works with borrowers through the application and approval process. Not the same as a broker — loan officers represent one lender.
Loan Origination The process of applying for, processing, and funding a new loan.
Loan Origination Fee A fee charged by the lender for processing the loan, typically expressed as a percentage of the loan amount (e.g., 1–3 points). Included in APR calculations.
M
Maturity Date The date on which the full outstanding loan balance is due. On amortizing loans, this should coincide with the final scheduled payment.
Merchant Cash Advance (MCA) A lump-sum advance against future sales, repaid via a fixed percentage of daily/weekly credit card or bank deposits. Not technically a loan — it's a purchase of future receivables. Priced via factor rates. High effective APRs; fast approval; often used by businesses that can't qualify for bank products.
Mezzanine Financing Subordinated debt or preferred equity that sits between senior secured debt and equity in the capital stack. Higher risk for the lender means higher cost for the borrower. Common in leveraged buyouts and real estate development.
Microloan A small loan — typically under $50,000 — often offered by CDFIs, nonprofits, and the SBA Microloan program. Targets startups, early-stage businesses, and underserved entrepreneurs who don't qualify for traditional bank products.
Monthly Recurring Revenue (MRR) Predictable monthly revenue from subscriptions or contracts. Some SaaS and subscription-business lenders use MRR as the primary underwriting metric rather than traditional financials.
N
Net Operating Income (NOI) Revenue minus operating expenses, excluding debt service, taxes, and depreciation. The standard numerator in DSCR calculations for commercial real estate and business lending.
Non-Recourse Loan A loan where the lender's only remedy on default is the pledged collateral — they cannot pursue the borrower's other assets. Rare in small business lending; more common in large commercial real estate deals.
Note The formal legal document that evidences a debt obligation and promises repayment. "Signing the note" = committing to repay the loan.
O
Operating Capital See Working Capital.
Origination See Loan Origination.
Overcollateralization Pledging more collateral than the loan amount requires. Lenders sometimes require this when collateral is illiquid or volatile in value.
Overhead Fixed business costs not directly tied to production — rent, insurance, administrative salaries, utilities. Underwriters review overhead relative to revenue to assess operating leverage and repayment capacity.
P
Payment-in-Kind (PIK) A form of interest or dividend that is paid in additional debt or equity rather than cash. Rare in small business contexts; more common in private equity and mezzanine structures.
Personal Guarantee A legal commitment by a business owner to personally repay a business loan if the business cannot. Standard on most small business loans. Makes your personal assets (home, savings) available to the lender as recourse.
Personal Loan An unsecured installment loan to an individual for any purpose. Rates are driven by personal credit score and income. Often used by business owners to fund their businesses when the business itself can't qualify.
Points Upfront fees expressed as percentages of the loan amount. One point = 1%. Common in mortgage origination and some commercial loans.
Prepayment Penalty A fee charged for paying off a loan early. Common in fixed-rate commercial loans and some mortgages — lenders use it to protect their expected interest income.
Prime Rate A benchmark interest rate published by major banks, historically tied to the Fed Funds Rate (typically Prime = Fed Funds + 3%). Many variable-rate loans are priced as "Prime + X%."
Principal The original loan amount, before interest. Principal is reduced with each payment on an amortizing loan.
Promissory Note See Note.
R
Recourse The lender's right to pursue the borrower beyond the pledged collateral. Most small business loans are full-recourse — if collateral is insufficient, the lender can pursue other assets and personal guarantors.
Refinancing Replacing an existing loan with a new one, typically to get a better rate, lower payment, or access equity. Has closing costs and resets the amortization clock.
Revolving Credit A credit facility you can draw, repay, and draw again up to the limit. Credit cards and lines of credit are revolving. Distinct from installment loans, which have a fixed draw and repayment schedule.
Risk-Based Pricing Setting interest rates based on the assessed risk of the borrower. Higher credit risk = higher rate. Standard practice in commercial and consumer lending.
S
SBA Loan A loan partially guaranteed by the U.S. Small Business Administration. Lenders originate SBA loans; the SBA guarantees a portion (typically 75–85%), reducing lender risk and enabling better terms for borrowers. Major programs: SBA 7(a) (general purpose), SBA 504 (fixed assets/real estate), SBA Microloan (small startups).
Second Lien A lien that is subordinate to the first lien on the same collateral. If the borrower defaults, the first lienholder is paid before the second lienholder. Higher risk for the second lien lender = higher rate.
Secured Loan A loan backed by collateral. If the borrower defaults, the lender can seize the pledged asset.
Senior Debt The highest-priority debt in a borrower's capital structure. Senior debt holders are paid first in default or liquidation.
Soft Pull (Soft Inquiry) A credit check that does not appear on the borrower's credit report and does not affect their credit score. Lenders use soft pulls for pre-qualification; hard pulls follow for formal underwriting.
Spread The difference between a benchmark rate (e.g., Prime or SOFR) and the actual rate charged to the borrower. "Prime + 2.5%" means the spread is 2.5%.
Subordinated Debt Debt that ranks below senior debt in repayment priority. Higher risk means higher interest rates. Also called junior debt or mezzanine debt.
SOFR (Secured Overnight Financing Rate) The benchmark rate that replaced LIBOR for most U.S. variable-rate loans. Based on overnight U.S. Treasury repurchase transactions. Many commercial loans are now priced as "SOFR + X%."
T
Term Loan A fixed amount borrowed and repaid over a set period (the term) via regular scheduled payments. Can be short-term (under 2 years), medium-term (2–5 years), or long-term (5+ years). The most common commercial loan structure.
Term Sheet A non-binding summary of proposed loan terms — amount, rate, term, collateral, covenants — issued by a lender before full commitment. Basis for final documentation.
Trade Credit Credit extended by suppliers, allowing businesses to pay for goods after receipt (e.g., net-30 or net-60 terms). Not a loan in the traditional sense, but a major source of short-term working capital.
Tranche A portion of a larger loan or credit facility, disbursed at different times or under different conditions. Common in construction loans and multi-phase real estate projects.
U
UCC Filing (Uniform Commercial Code) A public notice filed by a lender to establish their lien on a borrower's personal property (equipment, inventory, receivables). Lenders file a UCC-1 financing statement with the state. A UCC blanket lien covers all assets.
Underwriting The process of evaluating a loan application — assessing creditworthiness, cash flow, collateral, and risk — to decide whether to approve the loan and on what terms.
Unsecured Loan A loan with no specific collateral pledged. The lender relies on the borrower's creditworthiness and cash flow. Higher risk = higher rate. Personal loans and some business lines of credit are unsecured.
V
Variable Rate An interest rate that changes over time, typically tied to a benchmark (SOFR, Prime). Lower initial rates than fixed, but payment amounts can increase. Also called a floating rate.
Venture Debt Debt financing for venture-backed startups, typically structured as term loans with equity warrants. Extends runway without the dilution of another equity round.
W
Waterfall The priority order for distributing cash flows or proceeds from a sale/liquidation among creditors and investors. Senior secured lenders are paid first; equity holders last.
Working Capital Current assets minus current liabilities. Represents the liquid resources available for day-to-day operations. Positive working capital = more liquidity; negative = potential cash flow stress.
Working Capital Loan A short-term loan designed to fund daily operations — payroll, inventory, accounts payable — rather than long-term investments. MCA, short-term term loans, and lines of credit are common working capital products.
Know Your Terms Before You Borrow
Understanding this vocabulary before you approach a lender puts you in a stronger negotiating position. When a lender quotes a factor rate instead of an APR, you'll know to ask what that translates to annually. When a term sheet includes a blanket UCC lien and a personal guarantee, you'll know what you're signing. When a lender describes their product as "revenue-based," you'll know what the repayment structure looks like.
FundScout matches borrowers with vetted commercial lenders at no cost to register. If you're ready to explore your options, submit a funding request and we'll connect you with lenders whose criteria fit your deal.