35 plain-English definitions for every term you'll encounter when applying for a business term loan.
This glossary covers 35 terms that show up in term loan applications, offer letters, and loan agreements. Use it as a quick reference before you apply or whenever a lender's paperwork sends you to a search engine.
Terms are organized alphabetically and grouped by starting letter so you can jump straight to what you need. Each card includes a short definition and, where relevant, a link to a deeper article on this site.
Hover over any underlined term within this page to see a quick definition without leaving your place.
Amortization is the gradual repayment of a loan through scheduled principalThe original borrowed amount, not including interest or fees. and interest payments spread across the loan's life. Early payments go mostly toward interest; later payments shift toward paying down the balance.
APR is the annualized cost of borrowing expressed as a percentage, and it includes both the interest rateThe percentage of the loan balance charged as a fee for borrowing, quoted as an annual rate. and any fees rolled into the loan. It's the most apples-to-apples number for comparing offers from different lenders.
A balloon payment is a large lump-sum payment due at the end of a loan term, following a period of smaller regular payments. It's common in commercial real estate loans and some short-term financing structures.
A bridge loan provides immediate capital to cover the gap between a current need and the arrival of permanent financing. Terms are typically short (6–24 months) and rates run higher than conventional term loans.
Cash flow is the net movement of money into and out of a business over a given period. Lenders scrutinize it closely because positive cash flow is what makes consistent loan payments possible.
A CDFI is a federally certified lender whose mission centers on financing underserved communities and businesses that traditional banks often overlook. They frequently offer lower rates and more flexible underwritingThe process by which a lender evaluates a borrower's creditworthiness and risk before approving a loan. for minority, veteran, and women-owned businesses.
Collateral is an asset a borrower pledges to secure a loan, giving the lender the right to seize it if the borrower defaults. Common forms include real estate, equipment, inventory, and accounts receivable.
A FICO score is a numerical rating from 300 to 850 that reflects a borrower's creditworthiness based on payment history, credit utilization, and the length of credit history. Most term loan lenders want to see a score of at least 620, and the best rates typically require 700 or higher.
Debt consolidation means combining multiple existing debts into a single new loan, often to reduce the number of monthly payments or to secure a lower overall interest rate. It can free up cash flowThe net movement of money into and out of a business over a period; positive cash flow supports loan repayment. when the new payment is smaller than the sum of the old ones.
A debt schedule is a complete inventory of a borrower's current debts, including outstanding balances, monthly payment amounts, interest rates, and maturity dates. Lenders request it during underwritingThe process by which a lender evaluates a borrower's creditworthiness and risk before approving a loan. to understand total debt obligations and calculate DSCRNet operating income divided by total debt service. Lenders typically require 1.25x or higher..
DSCR measures how much net operating income a business generates relative to its total debt obligations, calculated by dividing net operating income by total annual debt service. A ratio of 1.25x means the business earns $1.25 for every $1.00 of debt payment due, and most lenders require at least that threshold.
A draw period is the window during which a borrower can pull funds from a revolving credit facility like a business line of credit. Term loans don't have a draw period because they deliver the full loan amount as a single lump sum at closing.
Equipment financing is a loan or lease product designed specifically to fund the purchase of business equipment, from commercial ovens to manufacturing machinery. The equipment typically serves as collateralAn asset pledged to secure a loan; the lender can seize it if the borrower defaults., which makes approval easier for borrowers with limited credit history.
A factor rate is a decimal multiplier used instead of an interest rate to express total borrowing cost on products like merchant cash advances. A factor rate of 1.35 means you'll repay $1.35 for every $1.00 received, regardless of how quickly you pay it back.
Deep dive: Business Line of Credit vs. Merchant Cash Advance
A fixed rate is an interest rate that remains constant for the entire life of the loan, so every payment is the same amount. It's the better choice when rates are low or when predictable budgeting matters more than flexibility.
The interest rate is the percentage of the outstanding loan balance charged annually as the cost of borrowing. It doesn't include fees, which is why APRThe annualized cost of borrowing expressed as a percentage, including interest and fees. is often the more useful comparison figure.
Invoice factoring means selling outstanding invoices to a third-party factoring company at a discount in exchange for immediate cash. It's a form of asset-based financing that's distinct from a term loan because you're selling a receivable, not taking on new debt.
The LTV ratio compares the loan amount to the appraised value of the collateralAn asset pledged to secure a loan; the lender can seize it if the borrower defaults. securing it, expressed as a percentage. A lower LTV signals less risk to the lender, which often translates to a lower interest rate.
An MCA is an advance against future credit card or daily sales receipts, repaid automatically as a fixed percentage of daily sales until the total is cleared. It isn't technically a loan under most state laws, which means it often isn't subject to the same consumer protections or interest rate disclosures.
Deep dive: Business Line of Credit vs. Merchant Cash Advance
Mezzanine financing is a hybrid product that combines elements of debt and equity, giving the lender the right to convert the loan to an ownership stake if it isn't repaid. It sits below senior debtThe highest-priority debt in a borrower's capital structure; repaid first in bankruptcy or default. in repayment priority but above pure equity, and carries correspondingly higher rates.
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Compare My Options →An origination fee is a one-time charge collected at closing by the lender to cover the cost of processing, underwriting, and funding the loan, typically ranging from 0.5% to 3% of the loan amount. It reduces the net proceeds you receive, so factor it into your total cost when comparing offers.
A personal guarantee is a legally binding commitment from a business owner to repay a loan using personal assets if the business itself can't cover the debt. Most small business lenders require one, so defaulting can put personal savings, home equity, and other personal property at risk.
A prepayment penalty is a fee a lender charges when you pay off a loan ahead of schedule, designed to compensate for the interest income they lose when the loan ends early. Not all term loans carry one, so it's worth asking about this fee before signing.
Principal is the original amount borrowed, separate from any interest or fees charged on top of it. Each loan payment reduces the principal balance, and interest is recalculated on that shrinking balance as amortizationThe gradual repayment of a loan through scheduled principal and interest payments over the loan's life. progresses.
Refinancing replaces an existing loan with a new one, usually to capture a lower interest rate, extend the repayment term, or release a lien on collateralAn asset pledged to secure a loan; the lender can seize it if the borrower defaults.. The savings need to outweigh any origination feesAn upfront fee charged by the lender to process and fund the loan, usually 0.5–3% of the loan amount. or prepayment penaltiesA fee charged for paying off a loan before the scheduled end date, compensating the lender for lost interest income. triggered by paying off the old loan.
Revenue-based financing structures repayment as a fixed percentage of the business's monthly revenue rather than a flat installment. Payments naturally shrink during slow months and grow during strong ones, which can ease pressure on cash flowThe net movement of money into and out of a business over a period; positive cash flow supports loan repayment. but makes total cost harder to predict upfront.
The SBA 504 program is designed for purchasing fixed assets like commercial real estate and major equipment, using a three-party structure that includes a bank, a Certified Development Company (CDC), and the borrower. It typically requires a 10% down payment and offers long repayment terms at below-market rates.
The SBA 7(a) is the Small Business Administration's flagship loan program, offering government-guaranteed term loans up to $5 million for a wide range of business purposes. The government guarantee reduces lender risk, which is why 7(a) loans typically come with longer terms and lower rates than conventional small business loans.
The SBA guarantee fee is charged to the lender (and usually passed along to the borrower) in exchange for the government's promise to cover a portion of the loan if the borrower defaults. It's calculated as a percentage of the guaranteed portion of the loan and varies based on loan size and term length.
Senior debt holds the top position in a borrower's capital structure, meaning it gets paid before subordinated debtDebt that ranks below other loans in repayment priority if a borrower defaults; higher risk means higher interest rates. or equity in a default or bankruptcy scenario. Because it carries less risk for the lender, senior debt generally comes with lower interest rates than junior or mezzanine financing.
Subordinated debt ranks below senior debtThe highest-priority debt in a borrower's capital structure; repaid first in bankruptcy or default. in the repayment queue, so its holders get paid only after senior creditors are made whole. That added risk means lenders of subordinated debt charge higher interest rates to compensate.
A term loan delivers a fixed lump sum upfront that the borrower repays in regular installments over a set period, typically one to ten years. It's one of the most common forms of small business financing and can fund everything from equipment purchases to working capital needs.
Underwriting is the process lenders use to assess a borrower's creditworthiness before approving a loan, typically reviewing credit scoreA numerical score (300–850) representing a borrower's creditworthiness based on payment history, utilization, and credit history length., cash flow, collateralAn asset pledged to secure a loan; the lender can seize it if the borrower defaults., and debt load. The result determines whether the loan is approved, and at what rate and terms.
A variable rate is an interest rate that can rise or fall over the life of the loan based on a benchmark like the prime rate or SOFR. It can start lower than a fixed rateAn interest rate that stays the same for the entire loan term, making payments predictable., but it introduces uncertainty into your monthly payment and total borrowing cost.
Working capital is the difference between a business's current assets and its current liabilities, and it measures the liquidity available to cover day-to-day operations. Lenders check it to make sure a borrower can handle both existing obligations and new loan payments without straining operations.
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