Lending Terms Glossary

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Lending Terms Glossary

A

• ACH (Automated Clearing House): A centralized electronic network in the United States used for bank-to-bank financial transfers. It is standardly used for automated, low-cost commercial transactions, such as recurring loan payments and business payroll.
• Affiliate: A business entity that is linked to a larger parent organization through a partial ownership stake held by that parent company.
• Amortization: The process of systematically liquidating a debt over a specified period through regular, fixed installments. Each scheduled payment covers both the accruing interest and a portion of the principal balance.
• Amortization Schedule: A complete chronological table of loan payments showing the exact amount of principal and interest allocated from each installment, along with the remaining loan balance after each period.
• Appraisal (Valuation / CMA): The formal, objective process of determining the current fair market value of an asset, liability, or an entire business entity.
• APR (Annual Percentage Rate): The annualized total cost of a loan expressed as a percentage. Unlike a nominal interest rate, APR legally must include both the interest rate and mandatory up-front loan fees or points.
• Assets: Economic resources owned by a business that hold monetary value and are expected to produce future economic benefits.
  • Current Assets: Short-term liquid assets that can reasonably be converted into cash within one single year (e.g., cash, accounts receivable, inventory).
  • Fixed Assets (Physical Assets): Tangible, long-term property used in business operations to generate income that cannot be quickly liquidated (e.g., real estate, machinery, vehicles, equipment).
  • Intangible Assets: Non-physical but highly valuable corporate holdings, including intellectual property (patents, trademarks, copyrights) and financial assets like accounts receivable, stocks, or 401k portfolios.

B

• Balance Sheet: A core financial statement summarizing a company’s financial position at a specific point in time. It reflects the fundamental accounting equation: Assets = Liabilities + Owner’s Equity.

C

• Capital: The financial financial resources, liquidity, and physical assets utilized by a business to fund ongoing operations, invest in growth, and drive corporate revenue.
• Capital Gain: The financial profit realized when the selling price of an asset or investment exceeds its original purchase price. A capital loss occurs if it is sold for less than the purchase price.
• Cash Flow: The net amount of cash and cash equivalents being transferred into (inflows) and out of (outflows) a business during a specific financial reporting period.
  • Positive Cash Flow: Inflows exceed outflows, indicating a company’s healthy capacity to meet its current financial obligations (solvency).
  • Negative Cash Flow: Outflows exceed inflows, indicating that operational expenses are temporarily outpacing cash revenues.
• Collateral: An asset or property pledged by a borrower to secure a loan. In the event of a loan default, the lender reserves the legal right to seize and liquidate the collateral to recover the unpaid loan balance.
• Compound Interest: The calculation of interest on the initial principal amount plus all accumulated interest from previous periods (“interest on interest”). It accelerates asset growth in investments but increases the total debt burden when applied to loan balances.
• Credit Score: A standardized three-digit numerical rating (typically FICO ranging from 300 to 850) that measures an individual’s or business’s creditworthiness based on historical debt management and payment performance.

D

• Debt Service Coverage Ratio (DSCR / DSC Ratio): A critical leverage metric used by lenders to evaluate a business’s capacity to service its debt obligations. It compares available net operating income to total debt service payments. Lenders typically require a minimum ratio of 1.25.
• Depreciation: An accounting method used to allocate the cost of a tangible asset over its useful life due to wear, tear, and obsolescence.

E

• EBITDA: An acronym for Earnings Before Interest, Taxes, Depreciation, and Amortization. It serves as a standard metric for assessing a company’s core operational profitability and cash-generating power.
• Employer Identification Number (EIN / Tax Number): A unique nine-digit identification number issued free of charge by the Internal Revenue Service (IRS) to identify legally operating business entities in the United States.
• Equity: The residual financial value belonging to the business owners after subtracting all liabilities from total assets: Equity = Total Assets – Total Liabilities.
• Equity Injection: The mandatory cash down payment that a buyer or entrepreneur must contribute from personal funds toward a business acquisition or project to secure commercial financing.

F

• FFE: An acronym for Furniture, Fixtures, and Equipment. This refers to movable tangible assets that have no permanent connection to the structure of a building but are essential for operations.
• Financial Projections: Forward-looking estimates of a business’s expected future revenues, expenses, and cash flows (typically covering a 1-to-3-year horizon) used by lenders to judge loan repayment viability.

G

• Global Debt Service: A comprehensive underwriting practice that aggregates the combined cash flows of the operating business, the primary borrower, and all personal guarantors to determine the collective capacity to repay a loan.
• Guarantee (Personal Guarantee): A legally binding provision in a commercial loan agreement making business owners personally liable for the corporate debt. If the company defaults, the lender can pursue the guarantors’ personal assets.

I

• Income Statement (Profit & Loss / P&L): A core financial statement that summarizes the total revenues earned and expenses incurred by a business over a specific reporting period, demonstrating net profitability.

L

• Leverage: The use of borrowed funds (debt) to finance corporate expansions, acquisitions, or asset purchases with the intent to increase the potential return on investment.
• Lien: A legal claim or right established against a borrower’s property or assets by a lender. The lien acts as security and remains active until the underlying debt obligation is fully satisfied.
• Liquidity: A measure of the ease and speed with which an asset can be converted into standard currency without losing its intrinsic value. Cash represents perfect liquidity.
• LOC (Line of Credit): A revolving credit arrangement provided by a commercial lender. It allows a business to draw down, repay, and redraw funds up to a maximum credit limit, incurring interest expenses exclusively on the outstanding balance.
• LTV (Loan-to-Value Ratio): A risk-assessment ratio calculated by dividing the total loan amount requested by the appraised fair market value of the property or collateral securing that loan.

M

• MCA (Merchant Cash Advance): A non-loan commercial financing mechanism where a funder advances a lump sum of capital to a business in exchange for a fixed percentage of its future daily credit card sales or bank deposits. Repayments fluctuate directly according to the company’s daily sales volume.
• Mortgage: A specific debt instrument secured by a lien on real estate property, where the borrower is obligated to pay back the principal plus interest over a structured term.

N

• Net: The definitive residual value remaining after all relevant deductions, expenses, and taxes have been subtracted from a gross total.
• Net Worth: The total financial value of an individual or business entity, calculated by subtracting all current liabilities from the total value of all assets.

P

• Participation (Loan Participation): A financing structure where multiple financial institutions join together to fund a large loan project, effectively sharing the funding requirements, risks, and interest rewards.
• Personal Financial Statement (PFS): A formal document detailing an individual’s personal assets and liabilities at a specific moment, providing a snapshot of their personal net worth for underwriting evaluation.
• PITI (Principal, Interest, Taxes, Insurance): The four core components comprising a standard monthly real estate mortgage payment. It reflects the combined cost of loan debt service, property taxes, and mandatory insurance premiums.
• Profit Margin: A baseline metric expressing a company’s profitability as a percentage of its total revenue.
  • Gross Profit Margin: Measures the profitability of a specific product line or service before overhead costs.
  • Net Profit Margin: Reflects the total bottom-line profitability of the entire enterprise after all expenses are deducted.

R

• Return on Investment (ROI): A performance metric expressed as a percentage used to evaluate the efficiency or profitability of an investment relative to its initial cost. The standard equation is: ROI = [(Income – Cost) / Cost] * 100.
• Revenue (Gross Sales / Top Line): The total amount of money brought into a company through its core business activities (sales of goods or services) before any operating expenses or deductions are applied.

S

• SBA 7(a) Loan: The primary commercial loan guarantee program administered by the U.S. Small Business Administration. Private lenders issue the loan, while the federal government guarantees a portion of the debt (up to 75–85%), reducing lender risk to fund working capital, equipment, or business acquisitions.
• SBA 504 Loan: An economic development financing program administered by the SBA through nonprofit Certified Development Companies (CDCs). It provides long-term, fixed-rate financing structured for major fixed asset projects, typically split as a 50% bank loan, 40% CDC loan, and 10% borrower cash equity.

T

• Terms: The collective set of structural details, rights, and obligations governing a loan agreement, including the maturity period, interest rate structure, transaction fees, and closing covenants.
• Third-Party Lender (TPL): A commercial bank or private investment institution that partners with a Certified Development Company (CDC) to fund SBA 504 projects, typically providing 50% of the required senior debt financing.

U

• UCC Filing (Uniform Commercial Code): A legal notice filed by a lender with a state’s Secretary of State office. It publicly registers the lender’s security interest in specific business assets pledged as collateral, preventing the borrower from using the same assets to secure other financing.

W

• Working Capital: A fundamental metric representing a company’s operational liquidity and short-term financial health. It measures the funds available for day-to-day operations and is calculated as: Working Capital = Current Assets – Current Liabilities.