Adjustable Rate Loan: A loan that initially is lower than a fixed rate that can change based on the index plus the margin periodically. It is usually fixed for a certain period of time – typically 6 months up to five years.
Amortization– Loan payments by equal periodic amounts calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance.
Annual Percentage rate (APR)– APR is what credit costs you each year, expressed as a percentage of the loan amount. It’s the annual amount charged for a loan, computed as a percentage of the principal, including any lender or closing costs, and any other additional fees.
Asset Based Financing– Asset Based Financing can be either working capital or term loans secured by assets such as accounts receivable, real estate, equipment, inventory etc. Factoring is also a form of asset based financing.
Business Line of Credit– A commercial loan that generally provides for working capital needs of a business. A working capital line (loan) is generally revolving, which means that the business can draw down on the line up to the authorized amount, repay any amount borrowed and re-draw funds as needed during the time that the “Line” is in place. It may be secured by collateral or unsecured
Business Credit Report– A business credit report is a profile of your business that contains critical information such as payment history that lenders examine when evaluating a business loan application. Dun & Bradstreet (D&B) is a well known for issuing business reports as well as Experian and Equifax.
Balloon Payment–The unpaid balance due at the end of a term loan for loan types that don’t fully amortize over the term of the loan. The balloon payment is due at the end of the loan to pay the balance in full.
Bridge Loan- A Bridge Loan is generally a short term loan that is used by business borrowers until a longer term loan can be arranged or a scheduled event occurs which provides the funds to repay the loan. Bridge loans may be used to, among other things, acquire real estate, make improvements, put tenants in place, etc. Bridge Loans may also be referred to as Interim Loans and generally carry higher interest rates and fees than Conventional Loans or Permanent Loans (Permanent Mortgage Loan).
Carrying Costs – Inventory costs associated with capital, storage, handling expenses, insurance, taxes and obsolescence.
Closing Costs: These are fees and expenses, over and above the price of the property, incurred by the buyer and/or the seller in the property ownership transfer. Examples are title searches, lawyer’s fees, survey charges, and deed filing fees, also known as settlement costs.
Compound Interest– Interest is compounded when the interest due on a business loan for a given period is added to the principal amount of the loan and that amount then also accrues interest.
Contingency Fund – Cash held for emergencies or unexpected outflows of funds. Also known as “Precautionary Balances.”
Conventional Loan – Owner User – A business loan, secured by a mortgage, to a borrower that uses all or substantially all of the property securing the loan for the operation of its business. Loan purposes may include the purchase or refinance of a commercial business property (owner-user), construction and improvements.
Cosigner: Someone that is willing to sign a loan obligation with you in case you default on your monthly payments. They go through the same loan process as the original signer for approval.
Current Ratio -A liquidity ratio that measures the ability of a business to pay short-term obligations. It is often used by banks when evaluating business loan requests. Formula: Current Ratio = Current Assets ÷ Current Liabilities.
Debenture – Debt instrument evidencing the holder’s right to receive interest and principal installments from the named obligor. Applies to all forms of unsecured, long-term debt evidenced by a certificate of debt.
Debt Service– The amount of the required periodic payments of principal and interest on a loan or other obligation
Debt Service Coverage Ratio (DSCR or DSC) –The amount of cash flow available to meet annual principal and interest payments on business loans and investment real estate loans. Formula: Debt Service Coverage Ratio = Net Operating Income ÷ Debt Service
Debt Financing – The provision of long term loans to small business concerns in exchange for debt securities or a note.
Debt to Total Assets Ratio – Total debt divided by total assets.
Debt to Equity Ratio -Ratio of the business’s debt to net worth. It is calculated by dividing liabilities by shareholders’ equity or the company’s net worth. The lower this ratio, the greater the size of buffer available to creditors/lenders, the higher the ratio the greater the potential risk.
Deed of Trust – A document under seal which, when delivered, transfers a present interest in property. May be held as collateral.
Default: Failure to make agreed upon periodic payments on a loan.
Default Interest– Default Interest is a higher rate of interest that is charged to a business borrower while their loan is in default (the default rate of interest will be set forth in the loan documents).
Deferred Loan – Loans whose principal and or interest installments are postponed for a specified period of time.
Discount interest rate – One in which the amount of interest is deducted from the face value of the loan with the borrower receiving the remainder.
EBITDA –EBITDA is one of the measures that lenders use to evaluate a business’s creditworthiness and its ability to repay a loan. It is calculated by taking the net earnings of the company (revenues minus expenses) and then adding back interest costs, taxes, depreciation and amortization.
Equity financing – The provision of funds for capital or operating expenses in exchange for capital stock, stock purchase warrants and options in the business financed, without any guaranteed return, but with the opportunity to share in the company’s profits. Equity financing includes long-term subordinated securities containing stock options and/or warrants. Utilized in SBIC financing activities.
Equity, Net Equity or Net Worth – Net Equity or Net Worth basically refers to the assets of the business minus its liabilities
Escrow Accounts – Funds placed in trust with a third party, by a borrower for a specific purpose and to be delivered to the borrower only upon the fulfillment of certain conditions.
Factoring– Factoring is a form of accounts receivable financing whereby a business will sell its accounts receivable to the factor (a third party) at a discount
Five “Cs” OF Credit – A system used by lending officers to evaluate a loan application: Character, Cash Flow, Collateral, Capitalization and Conditions.
Fixed Rate Loan: A loan that has fixed payment and remains constant for the life of the loan.
Goodwill – An intangible asset of a business that relates to a favorable relationship with customers, and excess earning power.
Hard Money Loan -Loan typically issued by a non-Bank lender based on the quick-sale of a piece of commercial real estate, an opportunistic opportunity to acquire property at a bargain price and possibly a distressed financial situation that may not qualify for traditional conventional financing. Hard money loans generally are short term “Bridge Loans” and carry high rates of interest and points.
Insolvency – The inability of a borrower to meet financial obligations as they mature, or having insufficient assets to pay legal debts.
Installment Loan – One in which the amount of interest is added to the principal and repaid by the borrower in equal periodic payments.
Intangible Assets – are business assets (other than cash or cash equivalents) that have value and generally are not physical assets. Examples of intangible assets are trade secrets, patents, trademarks, and copyrights. Good Will is also an intangible asset
Interest – An amount paid a lender for the use of funds.
Interest Rate Cap: A provision of an adjustable rate loan limiting how much interest rates may increase in a single adjustment period.
Late Charges -Late charges are amounts that will be charged if a borrower is late in a payment that is due even though the loan is not in default.
Lien – A charge upon or security interest in real or personal property maintained to ensure the satisfaction of a debt or duty ordinarily arising by operation of law.
Liquid Assets – Cash, checks and easily-convertible securities available to meet immediate and emergency needs.
Loan Packaging Fee– Any fee charged to the borrower for packaging or assembling of their business loan application and supporting documentation.
Loan to Value (LTV)– It is the amount of the loan divided by the value of the collateral taken as security for the loan (if there is a lien that will have a priority interest in that collateral, then the amount of that lien is deducted from the value of the collateral when determining the LTV.)
Lock-Out Period: A period of time after you get your loan that you cannot prepay it.
Long Term Debt – Notes and other debt obligations with a maturity date longer than one year.
Maturity – The date on which a loan becomes due.
Merchant Cash Advance (MCA): An advance based upon a company’s daily credit card receipts into their credit card merchant account.
Negative Net Worth – A business condition when total liabilities exceed total assets.
Origination: Securing a commercial loan application by supplying all the appropriate documents and signing all the appropriate forms necessary to obtain a loan.
Origination Fee or Points– An up-front fee charged by a lender for processing and committing to make a loan. Origination fees are quoted as a percentage of the total loan (ex. 1% of $100,000 = $1,000)
Prime Rate – Interest rate which is charged business borrowers having the highest credit ratings, for short term borrowing. As published daily in the Wall Street Journal, it is the basis for rates to other lenders.
Principal: The amount of money being borrowed excluding interest payments and fees.
Quick Ratio – Current assets less inventories divided by current liabilities. Also called “acid ratio.”
Revolving Credit Account – A formal line of credit offered to larger businesses in exchange for up-front fees and standard interest payments.
Secured Loan: A loan where the borrower puts forth collateral in the event they should default.
Short Term – Period usually one year or less.
Unsecured Loan: A loan where the borrower is not required to put for collateral to secure the loan.
Underwriting – is the process that a lender or other financial service uses to assess the creditworthiness or risk of a potential customer.
Variable Costs – Those costs of doing business such as cost of goods, shipping, handling and storage, sales commissions, etc., which are directly related to the sales of goods or services.
Working Capital –Working Capital is calculated by subtracting a company’s short term or current liabilities from its current assets. It is a measure of whether the company can meet its.obligations as they fall due.