Business loan broker glossary: 60 terms in plain English

Business financing has its own vocabulary, and brokers use it fast. This glossary covers the 60 terms you are most likely to hear on a call or read in an offer, in alphabetical order, each in a sentence or two. Keep it open during your next conversation with your broker.

If a term comes up that is not here, ask your broker to explain it. Professionals are glad to, and a clear answer is a good sign about how they will handle your deal.

A to C

Advance rate. In factoring and asset-based lending, the share of an invoice or asset value the funder pays you up front. An 85% advance rate on a $10,000 invoice puts $8,500 in your account now.

Amortization. Paying a loan down in regular installments that cover interest and principal, so the balance reaches zero by the end of the term.

APR. Annual percentage rate: the yearly cost of financing, including most fees, stated as a percentage. It lets you compare products with different terms and pricing on one scale. Our guide to APR versus factor rate shows the math.

Asset-based lending. A line of credit sized to your receivables, inventory or equipment, with the borrowing limit moving as those assets change. See asset-based lending.

Balloon payment. A large final payment due at the end of a loan whose regular payments did not fully pay it off.

Blanket lien. A lien on all of your business assets, not just one machine or one set of invoices. Common on working capital and MCA products.

Buy rate. The rate or factor a funder offers the broker on your deal. The broker may present a higher sell rate, and the spread is part of the broker's pay.

Buyout. The price to own leased equipment at the end of the lease. A $1 buyout lease works like a loan. A fair market value lease has lower payments and a larger buyout.

Collateral. An asset the lender can claim if you do not repay: equipment, receivables, real estate, inventory or cash.

Commitment letter. A lender's written promise to fund on stated terms, usually with conditions. It comes after approval and before closing documents.

Confession of judgment. A clause where you agree in advance that the funder can obtain a court judgment against you without a lawsuit. Several states now void these in small business financing.

Consolidation. Replacing several debts, often multiple cash advances, with one new loan or advance at a single payment.

Contracts out. Broker shorthand meaning the funder has sent closing documents for you to sign.

Covenant. A promise in the loan agreement, such as keeping a minimum debt service coverage ratio or sending financial statements each quarter. Breaking one can trigger a default.

Credit memo. The lender's internal write-up of your deal, prepared by the underwriter for the credit decision. It is standard on bank and SBA loans.

Cure period. The time you have to fix a covenant breach or missed payment before the lender can call a default.

D to H

Daily or weekly debit. An automatic ACH withdrawal from your business account to repay an advance or short-term loan. Daily debits run every business day.

Debt schedule. A list of every business debt you owe: lender, original amount, balance, payment, maturity and collateral. Brokers ask for it early.

Decline. A lender's no. For loans and lines, Regulation B gives a business with gross revenue of $1 million or less the right to request specific reasons within 60 days of the notice, and the lender must answer within 30 days.

Default. Failing to meet the agreement's terms, most often a missed payment, which lets the lender demand the full balance or use its collateral.

Disclosure. The standard form, required in a growing list of states, that shows your amount financed, total cost, payment and, in some states, estimated APR and broker compensation.

Draw. Taking money from a line of credit. You pay interest only on what you have drawn.

DSCR. Debt service coverage ratio: cash available for debt payments divided by those payments. A DSCR of 1.25 means you earn $1.25 for every $1.00 of loan payments.

Early payoff discount. A reduction some cash advance funders give if you repay the full balance before the end of the term. It is not automatic, so ask for it in writing.

Equipment finance agreement. A loan for equipment where you own the asset from day one and the equipment is the collateral. See equipment financing.

Factor rate. A flat multiplier on the amount advanced. A $50,000 advance at a 1.35 factor rate means you repay $67,500, whether that takes four months or nine.

Factoring. Selling your unpaid invoices to a funder for cash now. The funder collects from your customer. See invoice factoring.

Funding call. A short recorded call from the funder before it releases money, confirming your identity, the amount and the payment terms.

Hard pull. A full credit inquiry that shows on your report. myFICO notes that one new hard inquiry lowers most FICO Scores by fewer than five points, and scores consider it for one year.

Holdback. The fixed percentage of daily card sales or deposits a cash advance funder collects until the payback amount is reached. Also called the specified percentage.

I to P

ISO. Independent sales organization: the cash advance industry's name for a broker or brokerage that places deals with funders.

Lien position. Your lenders' order of claim on collateral. A first position lender is paid first. In cash advances, second position means a second funder behind the first.

Line of credit. A revolving limit you draw from, repay and draw again. See lines of credit.

Loan agent. The SBA's term for anyone paid to help prepare or package an SBA loan application, including brokers. Agents are disclosed on SBA Form 159.

Loan-to-value. The loan amount divided by the collateral's value. A $160,000 loan on a $200,000 machine is 80% loan-to-value.

Merchant cash advance. A purchase of a share of your future sales for a lump sum today, repaid through a holdback or fixed debit. See merchant cash advance.

Net funding. The cash that actually lands in your account after fees and any payoff of prior balances are deducted from the gross amount.

Origination fee. A lender's fee for setting up the loan, usually a percentage of the amount and often taken from proceeds.

Paydex. Dun and Bradstreet's business credit score, based on how promptly you pay suppliers. Higher is better.

Payback amount. The total you will repay on a cash advance: the amount advanced times the factor rate. Also called the purchased amount.

Personal guarantee. Your personal promise to repay if the business cannot. Almost every small business loan has one.

Points. Percentage points of the funded amount. A broker fee of three points on $100,000 is $3,000.

Prepayment penalty. A charge for paying a loan off early. Ask about it before you sign, not after. Our guide to early payoff covers the details.

Prime rate. The benchmark rate banks base many variable business loans on. SBA and bank lines are often priced as prime plus a margin.

R to S

Reconciliation. A cash advance clause that lets you ask the funder to adjust payments to match your actual sales when revenue drops.

Recourse. In factoring, whether you must buy back an invoice your customer does not pay. Non-recourse factoring shifts that risk to the funder, for a higher fee.

Renewal. A new advance or loan from the same funder, often offered once you have repaid about half the first one, as YouLend's renewal guide describes. The new money usually pays off the old balance first.

Reverse consolidation. A funder makes weekly deposits into your account that you use to cover existing cash advance payments, then you repay the reverse funder over a longer schedule.

SBA 7(a). The SBA's main guaranteed loan program, made by banks and other lenders, up to $5 million according to the SBA. See SBA loans.

SBA 504. An SBA program for real estate and major equipment, split between a bank and a certified development company.

SBA Form 159. The form that discloses every agent paid on an SBA loan and how much. Our guide to SBA Form 159 walks through it.

Sell rate. The rate or factor presented to you. The gap between buy rate and sell rate is part of the broker's pay, and you can ask about it.

Soft pull. A credit check that does not affect your score. Many lenders pre-qualify with one. See soft pull versus hard pull.

Stacking. Taking a new cash advance while one or more are still open. Many funder contracts prohibit it.

Stips. Stipulations: the documents or conditions the lender needs before funding, such as a voided check, a recent bank statement, a landlord letter or proof of ownership.

T to U

Term sheet. A summary of an offer: amount, rate or factor, term, payment, fees, collateral and conditions. It is not the contract. Our guide on reading a term sheet goes line by line.

Time in business. How long your business has operated, usually measured from formation or first deposits. Most products have a minimum.

UCC-1. The public filing a lender makes to record its lien on your assets. Under UCC section 9-515, a filing lasts five years unless the lender continues it in the last six months.

Underwriting. The lender's review of your file: bank statements, credit, tax returns, collateral and industry, ending in a decision.

Use of funds. What the money is for. Lenders ask because it shapes the product: equipment points to an equipment loan, payroll gaps point to a line.

Put the words to work

Knowing the vocabulary helps you ask sharper questions: "What is the buy rate on this?", "Is there an early payoff discount in writing?", "Which lien position will this lender take?" Brokers who hear those questions know you are paying attention, and they move faster for you.

When you are ready to talk to one, search the register by loan type or region. Every entry carries a register number and last checked date, and verified entries show fees in writing.