Business Loan Terminology & Definitions
Not sure what a loan term or acronym means? You’re not alone! Here we break out common business loan terminology and their definitions.
ACH– Acronym that stands for Automated Clearing House, it is an electronic network that transfers and processes financial transactions, usually by debiting a checking account and transferring the funds to a service provider’s bank account.
Amortization Schedule– A table detailing each payment on a loan with compounding interest, such as a mortgage. The table will often show how much is being paid to the principal of the loan and how much to interest.
APR– Acronym for annual percentage rate. This is interest rate effective for an entire year, not just a given month. Usually APR also includes fees as part of the cost of the loan.
Auto Debit– The act of automatically having loan payment obligations taken out of the borrower’s bank account to satisfy the monthly payment obligation.
Average Monthly Credit Card Sales– The amount of sales a business receives from processing credit cards over a period of time. The average monthly sale is calculated by adding all the monthly sales over a period of time (typically the most recent four to six months) and dividing the total by the number of months in the period.
Balance– The amount left to satisfy the loan. This amount may change daily depending on type of interest charged in the loan.
Bridge Financing– A type of short-term loan a business takes out to meet needs before a longer-term loan can be obtained. Typically bridge financing rates are higher than for other types of loans.
Borrower– The debtor who receives money from the lender in exchange for a promise to pay back the money plus interest over a period of time. The debtor may promise or “pledge” collateral to secure the loan.
Cash Flow– The movement or flow of money in and out of a business. The measurement of the cash flow helps determine the health and viability of a business.
Collateral– This is a borrowers promise or pledge to secure a loan with a specific piece of property. Examples of collateral range from real estate to automobiles. Some lenders offer no collateral business loans.
Co-Signer– Individual or business that agrees to be obligated to pay the loan along with the borrower. Co-signers are often required when the borrower does not have sufficient credit worthiness by themselves to qualify for a loan.
Compound Interest– A financing tool where interest is added to the principal of the loan so that afterwards the interest earns interest.
Credit Based Loan– This type of loan is only given to borrowers based upon their credit worthiness or credit score, and typically does not look to other considerations. (Have less-than-perfect credit? Learn about bad credit business loans.)
Credit Card Processor– The company that handles debiting customers’ credit card accounts and crediting the merchant’s or business’s bank account. These companies typically charge a transaction fee.
Credit Score– Generic term for calculation to express the credit worthiness of an individual or business. Many different formulas exist to calculate a credit score.
Daily Credit Card Receipts– The amount of money paid to a business from customer’s credit cards in a given 24-hour period regardless of whether the funds have actually been received or not.
Daily Holdback– The practice of taking a portion of the credit card sales everyday to satisfy the cash advance obligations.
Effective Annual Interest Rate– The rate of interest on a loan when compounding occurs more frequently than once a year.
Factor– A third party that provides a cash advance to a business in exchange for a discounted share of future revenues.
Factor Rate– The percentage the lender or provider of the advance charges for providing the cash advance. If the factor rate in 10% and the advance is $20,000, then the total that would be paid back is $22,000.
FICO– Refers to a credit rating score issued by the company FICO. The exact formula for scoring an individuals credit is kept secret by FICO, but factors such as timeliness of payments and debt to income ration play a major role in the calculation.
Fixed Interest Rate– A type of loan where over the course of the life of the loan there is no fluctuation in the interest rate charged by the lender.
Floating Interest Rate– Another name for variable or adjustable interest rate. The interest rate changes during the course of the loan term based on certain conditions as defined by the loan agreement.
Gross Profit– The difference between a business’s revenue and the cost of the products sold.
Gross Receipts– The total amount of money a business received from all sources during a given period of time.
Holdback Percentage– The portion of the daily credit card receipts the advance provider will take to pay the merchant’s obligation.
Installment Loans– A loan repaid over time with a specific number of regular payments.
Interest– A fee paid by a borrower to a lender as part of the price for use of the lender’s money.
Late Charges– A fee charged by a lender to borrower when borrower fails to make a scheduled payment. The fee is usually added to the loan principal.
Lender– An individual or company that gives money in exchange for a promise from the borrower to repay the money plus interest over a set period of time.
Line-of-Credit– A type of business loan that often provides for day-to-day needs of a business. A business draws up to an agreed upon maximum, but must repay any amount drawn on a set schedule.
Loan– A type of debt where the borrower promises the lender to repay a specific amount of money, plus interest over a set period of time. Payments are typically made monthly.
Loan Term– The length of time loan repayment has to be accomplished within.
Lock Box Account Withholding– All of the business’s credit card receipts are deposited into an account controlled by the lender and the agreed portion is forwarded onto the business, usually by ACH.
Merchant Cash Advance– Money is advanced to a small business by a lender in exchange for a percentage of daily credit car receipts. The daily percentage continues until the payment obligation is fulfilled.
Merchant Terminal– Refers to a point of sale devise used to process credit card payments.
Micro Loan– A type of small loan, often aimed at small businesses, to help borrower get business started. Amounts usually range from $500 to $20,000.
Net Income– The difference between all of a business’s income and all of its expenses.
Net Operating Income– All of a business’s income minus expenses, except taxes and interest.
Pay Back Period– The length of time it is estimated it will take to fulfill the obligations of the cash advance.
Personal Guarantee– A promise made by an individual to repay a loan if the original borrower (usually a small business) defaults. The individual puts their assets at risk should the borrower fail to repay the loan. The lender is usually under no obligation to go after the borrowers assets before seeking repayment from the issuer of the personal guarantee. (Also learn about no personal guarantee loans.)
Prepayment Penalty– A fee charged when a loan is paid back early. It is typically the equivalent of a few months of interest.
Repayment– The act of returning the money borrowed from the lender, usually also including the interest charged over the life of the loan.
Revenue– The income a business receives from its typical business activities, such as sales.
Secured Loan– A type of loan where the borrower and lender agree upon some form of collateral from the borrower to guarantee the loan should the borrower default.
Short-Term Business Loan– A loan to a business, often a small business, with a repayment term of eighteen months or less.
Split Withholding– A technique of automatic withholding where the credit card processor automatically splits the receipts between a business and a lender or finance company.
Tax Deductible Loans– A type of loan where the cost of the loan qualifies as a deductible business expense for tax purposes.