Small Business Funding Glossary 101

Earned Income Credit (EIC): This is a refundable income tax credit that assists low to moderate income working individuals and families.

Earned Income: Money that is received or receivable resulting from finished, paid work.

EBITDA: Another common business loan acronym EBITDA stands for Earnings Before Interest, Taxes, Debt, and Amortization. This is yet another way of indicating your business’s financial health, and measures your income without taking into account accounting decisions.

Economic Injury Disaster Loan (EIDL): a working capital loan that provides necessary operating funds to enable eligible businesses to overcome the financial impact of a declared disaster. This loan may not be used to purchase long-term assets.

Electronic funds transfer (EFT): The transfer of funds electronically between accounts.

Emergency cash: An account used specifically to set aside money for use in an emergency situation.

Employer Identification Number (EIN): A number used to identify a business regardless of whether they are a sole proprietorship, partnership, corporation or other non-personal entity. An EIN is the American version of a Canadian business number.

Endorsement: A person’s signature on a document, sometimes known as signing over a document or check. The signature gives that person’s rights to another person or group named in the endorsement.

Enhanced login security: Enhanced technology that protects an account from being easily accessed by someone who is unauthorized.

Entity Type: Your business’s entity type indicates what category it falls under legally. Whatever entity type you choose and declare will affect how your business operates within the law. From sole proprietorships to C-corps, every business, no matter how big or small, needs an entity type.

Equifax: One of the three credit bureaus.

Equity financing: Selling a piece of your business to an investor—friends or family, angel investors, or venture capitalists—in exchange for capital.

Equipment Financing: a small business equipment loan used to purchase business equipment using the purchased equipment as collateral to secure the loan.

Equipment Lease – obtaining use of machinery or equipment by renting it. The equipment is often owned by a leasing company or financial institution.

Equity – A stock or any other security representing the ownership stake in a company. Interest that a person earns on an asset. Various meanings, but in terms of finances, it’s ownership in an asset after debts related to that asset are paid off.

Escheat: The process by which an institution is required to turn over unclaimed members’ account balances to the state for safekeeping, when the account has been inactive for a specific period of time. The state of Maryland maintains a database of unclaimed property. People can search the database for lost or misplaced property.

Escrow: Financial instruments such as a property deed kept by a third party until a specific condition defined by the documents is fulfilled. Something, such as money, a document or an asset, kept in the custody of a neutral, third party until a specific condition has been met.

Escrow account: A trust account in which the lender holds funds for payment.

Extraordinary Items: Additional expenses that are outside “normal” operations and caused directly by the disaster.

Express loan: Loans of up to $350,000 may qualify for SBA Express, wherein the SBA review of the loan is done on an accelerated basis. Responses can be expected within 36 hours of the application submission.

Export Express loan: This is a streamlined process for lenders to get SBA-backed financing for loans of up to $500,000 using the lender’s own decisions processes and documentation. Under the Export Express program, lenders will receive a decision from the SBA within 24 hours of the application being filed.

Export Working Capital Program (EWCP): The EWCP is type of SBA 7(a) loan that’s specifically for businesses that generate sales through exports and require upfront assistance to support these sales. The maximum loan amount for export working capital is $5 million.

Experian: One of the three major credit bureaus.

Executor: Someone in a will who is named responsible for distributing the funds and property in an estate to the rightful heirs.

Factor Rate – an alternative method of presenting the amount of interest charged on a loan or lease. This rate is usually represented in decimals instead of a percentage. If you’re shopping for short-term financing, then you’ve probably encountered this term. Many short-term loan options’ costs are expressed through factor rates. Unlike APR’s (which are percentages), factor rates are decimal numbers that you multiply your principal debt by in order to see how much you’re ultimately paying off.

Fair Credit Reporting Act (FCRA): Federal law that promotes accuracy, fairness and privacy, and enables customers to view their own credit reports and dispute errors.

Fair Debt Collection Practices Act (FDCPA): Federal consumer protection law that prevents abusive debt collection practices.

Fair Market Value (FMV): Price an asset would garner if sold in the open market.

Federal Deposit Insurance Corporation (FDIC): A U.S. government corporation created by the Glass-Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks up to $250,000 per depositor per bank.

Federal Reserve System: The central banking system in the United States that issues money and provides services to the federal government and other financial institutions.

Federal Family Education Program (FFEL): Defunct higher education loans program funded through private partnerships administered at the state and local level.

Federal Trade Commission (FTC): Agency that protects consumer rights and enforces consumer protection laws.

FICO – an acronym for Fair Isaac Corporation, FICO is the largest and most well-known company that provides software for calculating a person’s credit score.

FICO score: A type of credit score created by the Fair Isaac Corporation that ranges between 300 and 850.

Fiduciary: A person who holds property in trust under the terms of a trust agreement.

Finance charge: The amount of interest paid by the borrower to the lender on a loan.

Financial Statements: A collection of records of an organization’s financial activities, over a specified period. There are 4 main reports: the income statement, the balance sheet, the statement of cash flows and the statement of shareholder’s equity. Formal records depicting the financial position and activities of a business, individual or entity. Financial statements are very structured and are subject to rules and regulations. Usually, financial statements include a balance sheet, income statement and statement of cash flows.

Field of membership (FOM): Field of membership – used to denote the requirements for credit union membership.  Eligibility can often be geographic or employer/association based.

Fixed Assets: A “tangible” asset, like property or equipment that can be used as collateral.

Fixed Rate – a rate that remains constant throughout the duration of the loan.

Fixed Interest Rate: As opposed to a variable interest rate, a fixed interest rate stays the same during the entire life of a loan.

Fixed assets: Also referred to as tangible assets, these are assets that are likely to be kept by the borrower for a long period of time, and aren’t easily convertible into cash. Examples of fixed assets include real estate properties, equipment, and land. These are the assets promised by the borrower as collateral in the event that they default on the loan.

Fixed Expense: A cost that does not fluctuate when there is an increase or decrease in business activity, such as sales or production. Examples of fixed expenses include a full-time employee’s salary, rent and insurance, among others.

Fixed interest rate: A fixed interest rate holds steady throughout the term of the loan; it does not change with the market.

Fixed-rate interest: Percentage will not change for the life of the loan.

Float: The amount of money deposited to an account that the financial institution cannot use immediately, because of the time it takes to process checks through the banking system.

Floating Interest Rate – an interest rate fluctuates over time depending on the market. A floating interest rate, also known as a variable or adjustable rate, changes with the market over time.

Forgery: The signing, or altering, of another person’s name in an attempt to be fraudulent.

Forbearance: A temporary postponement granted by the lender when borrower cannot make payments because of financial hardship. Interest accrues and is added to the overall amount owed.

Foreclosure: Lender legally takes possession of a mortgaged property when borrower is unable to make payments or meet obligations.

Free Application for Federal Student Aid (FAFSA): A form to determine the type of federal student aid for which students are eligible.

Fraud: Attempting to use deception for financial gain.

Garnishment: Act of employer withholding part of an employee’s wage to pay it to a creditor.

GPM%: Gross Profit (GP) ¸ Net Sales (NS). The measure of every sales dollar left after paying for the product; what percent of the sales dollar is left to cover operating costs and to create a profit.

Grace period: Period of time between graduation or leaving full-time college enrollment and making the first payment on a student loan. A grace period is a pre-determined amount of time following a payment’s due date in which you’ll be able to make due on your payment without incurring late fees.

Gross Profit: The cash left over when the total cost of goods is subtracted from the total revenue. The amount of money earned after considering expenses directly related to producing a product or service. Gross profit is typically calculated on a company’s income statement by taking revenue and subtracting cost of goods sold.

Guarantor: The legal entity and/or person who guarantees an obligation and has a legal duty to fulfill it.

Guarantee: The SBA doesn’t lend money directly, but guarantees a portion of loans made from third-party lenders. This protects the lender by ensuring that the SBA will take over a predetermined portion the loan if the borrower fails to pay. The benefit of this for small business entrepreneurs is that it takes a considerable amount of risk away from the lenders, which makes them more likely to provide a loan.

Guaranty fee: This is a fee that the borrower must pay, and can range from .25% to 3.75% of the loan amount. It can be financed with the loan proceeds.

Hardship Waiver: Method used to approve a lower interest rate, when one of the CET test conclusions results in a high rate determination.

Hard Credit Check – a type of credit information request that includes a borrower’s full credit report and has a negative effect on a borrower’s credit score.

Health savings account (HSA): An account that people can use to save for medical expenses that are not covered by their health plan. Medical savings account with tax benefits for people who participate in a high-deductible health plan.

Hold: A specific amount of an account holder’s balance that cannot be withdrawn until a certain debit or check is posted.

Holdback: Within the context of a Merchant Cash Advance, the holdback is the percentage of the daily credit and debit card receipts that are withheld every day by the provider to pay back the advance.

Home Affordable Modification Program (HAMP): A federal program created in 2009 that assists eligible homeowners to modify the loans on their home mortgage.

Home equity: The difference between the market value of a home and the outstanding mortgage balance.

Home Equity Line of Credit (HELOC): A type of secondary financing that consists of a revolving line of credit.

Home equity loan: Secondary financing secured by equity in the borrower’s home.

Inactive account: An account that hasn’t had a deposit or a withdrawal within a certain (usually extended) period of time. See also dormant account.

Income Statement: A formal financial statement that communicates the income, expenses and net income (or loss) for a business over a particular period of time. 

Incorporated: The state of being formed into a legal corporation.

Index: A statistical measure of change in an economy or a securities market. When referring to financial markets, an index is an imaginary portfolio of securities representing a particular market or a portion of it.

Individual account: An account where only the person who owns the account is permitted to make transactions.

Individual retirement account (IRA): A savings account in which individuals can save for retirement. An IRA offers the potential of its deposits being tax deductible. Allows taxpayers to direct pre-tax income into a retirement account. Distributions are treated as normal income and are subject to income taxes.

Inflation: A general increase in prices of goods and services in addition to a decrease in the purchasing power of a nation’s currency.

Interest: The amount of money accrued (added to an account) or the cost (fees or charges) associated with the use of money. The amount charged by lender to a borrower for using their assets. This amount is usually expressed as a percentage of the principal. 

Interest-bearing account: A bank account that earns interest over a specific period of time. Commonly, savings accounts are interest bearing. Some checking accounts are interest bearing.

Interest rate: The amount paid by a borrower to a lender over a certain period of time.

Invoice Factoring – a method of financing where a business sells its invoices to a factor company at a discount.

Interest-Only Payments: Making only interest payments on a loan without paying anything on the principal. At the end of the term, the borrower will either need to refinance or pay back the principal in a lump sum.

Insolvency: Insolvency is a business loan term that refers to the state of being unable to repay debts.

Income Statement: Shows the entity’s income and expenses. (similar to a Profit & Loss Statement)
 

Injury Analysis: Measures the effects of the disaster on the overall financial condition of the business.
 

Injury Period: The time period during which the business feels the adverse effects of the disaster.

Inventory Financing: Money you borrow based on the amount of inventory you own. As you sell your inventory, you pay back the loan. Some inventory financing companies will even upfront you the cash to purchase the inventory you need, and then you pay back the loan as you begin moving the inventory off your shelves. This differs from accounts receivable financing as lenders are using the inventory itself as an asset, before you even sell it. Accounts receivable financing is solely for invoices that represent a sale you’ve already made.

Income statements: A financial report that addresses the bottom line directly, by reporting how much a company has earned and spent over a period of time. If the difference between the gains and losses is positive, the statement shows net income. If the net amount is negative, the business suffers a net loss. Also known as a profit and loss statements.

Interest rate: A percentage that represents the current rate of borrowing or the amount earned on an interest-bearing account. For loans, higher interest rates generally represent higher risk. Interest rates may be fixed or variable.

Invoice financing: Raising capital for your business by selling unpaid invoices at a discount.

ISO – an acronym for Independent Sales Organization, ISO is an individual or organization that is not an Association member (ie. Not a Visa or Mastercard member bank), but still has a bank card relationship with an Association member bank. ISO’s provide payment-related services to members of an Association, either directly or indirectly, including customer service, sales, merchant solicitation and training activities.

Incentive Stock Option (ISO): A company benefit that gives an employee of that company the right to buy stock shares at a lower price than the fair market value. There is also the added benefit of a tax break on any profits earned from the stock share purchase.

JOBS act: Jumpstart Our Business Startups Act (JOBS Act): a law to encourage funding of small business by easing some regulations – passed in April 5, 2012.

Joint account: An account that is owned by 2 or more people.

Lease: A legal contract signifying rental of goods or property.

Lender: Entity that makes funds available for borrowing.

Leverage – the amount of debt a company uses to finance assets.

Liabilities: Claims (bills, invoices, etc.) against a corporation or person that are due to be paid. Liabilities are a business’s payable obligations, including loans, salaries, mortgages, and deferred payments. They are deducted from the business owner’s total equity. A financial obligation, debt, or claim, i.e. notes payable and accounts payable.

Lien: The lawful right to sell the mortgaged or collateral property of those who fail to meet the obligation of a loan contract. A lender’s claim against a collateral asset if the borrower is unable to repay their debt.

Linked account: An account connected to a person’s primary account.

Liquidity: The part of total assets that is available. Liquidity includes funds not held in fixed assets (such as property or an investment account) and not loaned to a person.

Liability: Obligation for repaying a loan in addition to charges and interest.

Lien: A lender or creditor’s right to secure a debt against the property of a borrower.  If obligations are not met, property may be sold.

Liquidation: Converting assets into cash, typically to settle debts with creditors.

Line of Credit:  line of credit is a business funding option that functions a lot like a credit card. You’ll be extended a line of credit from which you’ll be able to spend up to your credit limit. You’ll only have to pay off what you spend. A set amount of money that you can draw on as needed. It is very much like a credit card except you are able to pull cash out without penalty. A method of financing that gives small business owners access to a pool of funds whenever needed. When the funds have been used, interest is charged on the outstanding balance. After the balance is repaid, the line of credit reverts to its original balance.

Lien: A legal claim against an asset which is used to secure a loan and which must be paid when the property is sold. 

Limited Liability Entities (company/partnership): An LLE provides business owners with the favorable liability protection of corporations with the informality and tax advantages available to partnerships. It is a pass-through entity, like a partnership where the taxable income or loss is reported on the tax returns of the owners.

Limited Partnership: A business organization with one or more general partners, who manage the business and assume legal debts and obligations, and one or more limited partners, who do not participate in day-to-day operations and are liable only to the extent of their investments.

Lien: The business loan term lien refers to the act of using ownership of something as a guarantee for an obligation—in this case, repaying a loan. If a lender takes a lien on your property when you sign on for a loan, and you’re unable to pay your loan, then the lender will have the right to seize that property.

Liability: A legal obligation to settle a debt. Current (payable within one year) and long-term (payable after one year) liabilities are recorded on a company’s balance sheet. These liabilities can include accounts payable, taxes, wages, accrued expenses, and deferred revenues. The state of being responsible for something particular. In the business world, this typically refers to legal and financial responsibilities. 

Lien: A lien is the legal claim of a creditor to the collateral of a debtor who does not meet the obligations of their signed contract.

Line of credit: A pool of capital a business can draw from, up to a certain maximum. When you draw down on a line of credit, cash is made available in your bank account. This cash is a short-term loan that must be repaid with interest.

Liabilities: A business’ debts or obligations that can be resolved in the form of periodic payments or the transfer of goods or services.

Loan Agreement: When you sign on to take on debt, you’ll have to sign a contract called a loan agreement. This agreement will delineate the terms of your loan.

Long-Term: In the context of business loans, long-term refers to any debt that will be paid back in more than a year.

Loan Authorization and Agreement (LA&A): A contract between SBA and the borrower that spells out the terms and conditions of the loan.

Long-Term Debt: Long-term debt is money you borrow for large purchases, like real estate and equipment, which takes years to pay off. You will need to have a strong financial history to qualify for long-term debt.

Loan interest rate: This is the fee charged by a lender of a loan, with the exact amount being a percentage of the principal amount. Interest rates for SBA 7(a) loans can be either variable (the rate fluctuates over time) or fixed (based on a maximum rate determined by the Federal Register). The type of interest rate for a loan is chosen by the lender.

Loan-to-cost ratio (LTC): LTC is the loan amount divided by the total cost of a project. This comparison helps lenders determine the risk of offering an SBA loan for land or real estate. For example, if a lender is willing to loan $750,000 for a construction project that will cost the borrower a total of $1 million, the LTC ratio is 75%.

Loan forgiveness: Writing off all or part of a federal student loan balance when borrower meets certain criteria like a career in an eligible field such as teaching, law enforcement and others.

Loan term: Agreed time period for loan repayment.

Loan-to-value (LTV) ratio: A number that measures the ratio of the mortgage amount to the property value. LTV is calculated by dividing the mortgage amount by the appraised value of the property. It is expressed as a percentage.

Loan-To-Value (LTV) Ratio – the ratio of outstanding debt to the value of the collateral for the loan. Lenders will determine a maximum ratio they are willing to accept based on the value of the collateral.

Loan or credit agreement – If your company’s loan is fairly large, the lender may require a loan or credit agreement. A loan agreement contains terms and conditions for your loan in addition to those contained in the promissory note, security agreement, or mortgage. Common provisions in a loan agreement include provisions regarding the lender’s commitment to lend, repayment and note terms, things that must happen before the lender is obligated to advance funds, representations and warranties, agreements by the borrower to take or not take certain actions, and events of default.

LTV Ratio: A lender will consider the LTV ratio, or loan-to-value ratio, when you’re applying for a loan to purchase a specific thing. For instance, if you’re looking to get a loan to get a new piece of equipment, the LTV ratio will indicate how much of the equipment’s worth the loan amount will cover.

Marketplace – an online platform that connects borrowers and lenders. The amount that an asset is worth or can be sold for in a particular market place.

Maturity: The date when a note or a principal obligation becomes due and payable (its term ends). A loan reaches maturity on the day that you make your last loan payment. That is, once you pay off the principal and the interest on a loan, it has reached full maturity. A term loan’s maturity date is the length of time you have to repay the money you borrow. For example, if you open a 10-year loan in 2015, the date of maturity will be in 2025. The maturity of a loan is the agreed upon date that the loan is to be repaid in both principal amount and interest. SBA loans have a range of maturity dates, from a maximum of 10 years for loans given for inventory or working capital to a maximum of 25 years for loans given for real estate.

Maximum SBA guaranty: The SBA doesn’t not lend money directly to borrowers; it guarantees loans made by third-party lenders. Maximum SBA guaranty amounts vary based on the type of SBA 7(a) loan. For loans of $150,000 or less, the SBA guarantees a maximum of 85% of the loan amount. For loans of more than $150,000, the SBA guarantees a maximum of 75% of the loan amount. For Express loans, the SBA guarantees only 50% of the amount. The maximum guarantee that the SBA will make on a 7(a) loan is $3.75 million.

Master Promissory Note: Signed legal document that holds terms and conditions of a loan.

Member Business Lending (MBL): Refers to proposed legislation to increase credit union member business lending cap from 12.25% of assets to 27.5% for well-capitalized credit unions.

Merchant Cash Advance: A merchant cash advance is a short-term business financing option that is repaid through a daily percentage of your business’s credit card receivables. Merchant cash advances are easy to secure but often end up being the most expensive financing option. A lump-sum advance given to a business in exchange for a percentage of their future credit and/or debit card sales. An MCA is a short-term loan based on a business’ monthly sales volume. Repayment is made through a fixed debit or percentage taken off daily or weekly sales. A quick, easy way to get your business a lump sum payment in exchange for a share of future sales. There’s no need for collateral, even if your business has bad credit. Also considered an advance based upon a company’s daily credit card receipts into its credit card merchant account.

Micro-Loan: A small amount of money lent to new businesses with a low-interest rate. Micro-loans are typically issued by individuals as opposed to large lending bodies like banks or credit unions.

Microlender: Refers to lenders that extend very small loan amounts (typically <$50,000); often community-based lenders.

Mortgage – A type of loan to purchase commercial or residential property.. A mortgage gives the lender a security interest in real property owned by your company. That means that your company pledges the real property as collateral for the loan. If your company does not repay the loan, the lender can foreclose on the real property, sell it, and apply the proceeds to your loan. Real property means real estate owned by your company.

Monthly or annual revenue

Most lenders will require businesses to have a certain amount of revenue coming in each month or year. They want to assure that you have enough income coming in to pay off your current expenses along with the new debt you are applying for. 

Multi-factor authentication (MFA): A way to strengthen the level of security on a login by adding an additional end user authentication factor, such as a texted or emailed confirmation code. MFA helps to protect against fraudulent activities online.

NAICS: North American Industrial Classification System.

Net Income: A business’ total income after deducting the costs of goods, taxes and other expenses from the business’ cash receipts.

Non-bank ATM: An ATM that does not display a bank’s name or logo. These ATMs usually have an added fee for their use.

Normal Annual Sales: Those sales that would have been attained had the disaster not occurred. To determine this figure, you must first review historical sales figures and identify the trends.

Normal Gross Margin: The margin that would have been attained had the disaster not occurred. To determine this figure, you must first review historical sales figures and identify the trends.

Online banking: Account information and services available online from a person’s banking institution.

Open-end credit: Pre-approved loans made on a continuous basis, rather than at one time. It is also known as revolving credit.

Operating Leases: are deducted on the company’s operating expenses. If the lease is an operating lease, then the amount is already accounted for in total expenses and should not be shown as a scheduled debt.

Original interest rate: An interest rate that was given at the time the account was opened.

Overdraft: Spending more than the available funds in an account, causing a negative balance. A deficit caused by the withdrawal of more money from an account than the account currently holds.

Overdraft protection: A revolving line of credit that serves as a backup source of funds for a checking account. The protection helps avoid fees for spending more money than is in the account.

Owner equity: Owner’s equity refers to the assets they own in the business, less any funds needed to pay liabilities. Before applying for a loan for investment in a for-profit business, borrowers under the SBA 7(a) loan program must have reasonable owner equity. The most common form of owner equity is the down payment made on the business, but outside assets can be considered as well.

P&L (Profit and Loss Statement): also considered as Income Statement or Statement of Earnings. Measures Net Income or Loss over a defined period of time. In addition, having the simple formula of Revenues – Expenses = Net Income/Loss.

Paid in full: A status on a credit report that shows debts as paid, rather than reduced or settled.

Payee: A person to whom a check or other form of financial obligation is made payable.

Partnership: A type of unincorporated business organization in which multiple individuals, called general partners, manage the business and are equally liable for its debts; other individuals called limited partners may invest but not be directly involved in management and are liable only to the extent of their investments. A type of business where two or more individuals share ownership, pool resources and split responsibility for the company’s operations. Partnerships can be classified as general or limited. 

Pension: A fixed sum paid at regular intervals, typically following retirement.

Personal Guarantee – an individual’s legal promise to be personally responsible if a business becomes unable to repay a debt.

Peer-To-Peer (P2P) Lending – a method of debt financing that uses an online platform that connects borrowers and lenders. A term used to describe a loan agreement between a borrower and a lender without the use of an official financial institution, resulting in achieving higher interest rates for the lender and lower rates for the borrower than either would achieve through a third-party bank.

Periodic rate: A rate (such as interest) set on an account over a specific amount of time.

Personal identification number (PIN): A number that allows an account holder to gain access to an ATM or use a debit card or chip-equipped credit card.

Personal credit report: Prepared by a credit bureau, a personal credit report contains detailed information about an individual’s financial history with banks, credit card companies, collection agencies, and governments. Credit scores are based on the information in a credit report.

Personal credit score: The three national credit bureaus—Experian, Equifax and Transunion—use variations of the FICO Score algorithm to determine a personal credit score. This algorithm uses the patterns in hundreds of thousands of credit reports to approximate a consumer’s level of future risk.

Personal loan: A type of unsecured loan, meaning not tied to any property, for personal use and typically based on creditworthiness and other factors. If you’re a fairly new business owner who hasn’t really gotten a chance to build your business credit. Lenders will check your personal credit to gauge your creditworthiness.

Phase I: Process used to determine the amount of economic injury for a business in operation for at least a year prior to the disaster that had physical damage.
 

Phase II: Process to be used to determine economic injury for a business either in operation less than one year or not satisfied with result of Phase I analysis or submitted a Stand Alone EIDL request.
 

Phishing: A way of attempting to acquire information such as user names and passwords by pretending to be a trustworthy entity in email or other electronic communication.

Physical Loans: Funds to repair/replace disaster damaged or destroyed business assets such as real estate, inventory, machinery and equipment, etc.

Pilot 7(a) loan programs: In some cases, the SBA may choose to offer a pilot loan program to spur development in a specific sector or geographical region. These loans have their own terms and conditions separate from a standard 7(a) loan. They’re only offered during a fixed period of time, though maturity of the loan will likely occur after the pilot program is no longer offered.

Point-of-sale terminal (POS): A terminal service that allows a banking customer to access account funds at the location where the sale is made.

Points: A loan discount used to adjust the yield on a loan. Points may adjust a loan to what market conditions demand.

Power of attorney: A legal document that authorizes another individual to act on the behalf of another person in the event that they cannot act for themselves. Legal document that allows one person to make decisions, including financial ones, on behalf of another individual.

Prepayment penalty: A penalty levied if a loan is repaid earlier than the agreed upon terms, typically put in place to protect the lender and ensure that its anticipated yield on the loan will be earned. Prepayment penalty is a crucial business loan term for you to understand. Lenders with prepayment penalties, sometimes referred to neutrally as prepayment fees, will charge you for paying your loan off early.

Principal: The original amount borrowed or the outstanding balance yet to be repaid, excluding interest. The amount of money being borrowed excluding interest payments and fees. The amount borrowed, not including capitalized fees and interest. The amount borrowed or the amount still owed on a loan, separate from the interest.

Profit and Loss Statement (P&L): A report maintained by a business that shows the business’ income minus expenses.

Profit: The difference between the amount of money earned and the amount of money spent to earn the money.

Principal – the original sum of money borrowed in a loan or in an investment. Within the context of business loan terms, principal refers to the original size of your loan. If your business borrows $100,000, then your principal is $100,000.

Prime Rate: The business loan term prime rate indicates the interest rate at which the most creditworthy borrower can borrow. This is the rate what determines all other rates, as well. All less creditworthy borrowers will borrow at an interest rate that is often determined at “Prime Rate + X” with x being an interest rate determined by your own creditworthiness. Prime rate means the lowest rates that banks are giving to their customers. A low interest rate offered to the most creditworthy borrowers.

Profit and Loss Statement: A profit and loss statement, or a P&L or income statement, is a document that shows your business’s income and expense over a specific amount of time. Many businesses will need a P&L in order to apply for business financing.

Proprietorship: A proprietorship, or sole proprietorship, is a business entity-type for unincorporated businesses that consist of one individual.

Principal: the owner(s) of the Applicant Entity that have a controlling financial interest in the business. SBA defines controlling interest as an owner who owns 20% or more of the Applicant Entity or are a General Partner or Managing Member regardless of ownership percentage.

Primary Activity: The major business activity of the single legal entity or affiliated group, which is their predominant field of operation. (Commonly known as the Main Activity)

Projection: An estimate of future economic or financial performance. Generally presented in the form of a Profit and Loss Statement (P&L)

Preferred Lenders Program (PLP): This is a special status assigned to lenders who have a thorough understanding of SBA lending policies and have a proven track record of successful lending. PLP lenders can instantaneously approve borrower applications, making them more desirable to potential borrowers.

Private sector:  A for-profit businesses owned by private individuals or groups, rather than the government.

Preauthorized payment: A payment set up in advance at a bank by an account holder to automatically make payments.

Prepayment penalty: A fee for repaying a loan before it was due.

Primary or principal residence: The permanent residence where a person claims to reside.

Prime rate: An interest rate charged by a financial institution for loans made to larger business borrowers. Prime is typically the best rate available.

Private mortgage insurance (PMI): Insurance written by a private company that protects the mortgage lender against a potential loss incurred by a mortgage default (when a borrower stops making mortgage payments).

Promissory note: A written agreement between people in which a person or company agrees to pay another person or company a specific amount of money by a certain date. A promissory note is a contract. When your company signs a promissory note, it promises to repay to the lender a certain amount of money, at a certain time, and according to certain terms and conditions. A promissory note may be unsecured or secured. If a promissory note is unsecured, the lender is looking only to your company’s cash flow and profits for repayment of the loan. If a loan is secured, the lender still looks to your company’s cash flow and profit for repayment of the loan, but if the company does not pay, the lender looks to the security or “collateral” as a secondary source of repayment. Personal property means all property owned by your company other than real estate.

Revolving Credit: Revolving credit is just another term for a line of credit. Credit cards are considered a form of revolving credit.

Refinancing: Replacing an old loan with a new loan at a different interest rate by the same individual.

Repossession: Act of a creditor seizing property to make up for a borrower’s failure to pay on a loan.

Retirement: Stage of life after ceasing to work full-time.

Refinance: Replacing an old loan with a newer loan, generally offering better terms.

Revolving account: A specified line of credit that can be used repeatedly.

Revolving Line of Credit: The business loan term “revolving” denotes credit that can be used repeatedly. As such, a revolving line of credit is a line of credit that a business can spend on repeatedly up to the credit line, as long as they pay off their previous spending.

Residual Value: The value of an asset at the end of its lease or at the end of its useful life.

Retained Earnings: The amount of net income left over after a business has paid out dividends to their shareholders. Often, the retained earnings are used within the business for investment, growth or capital purchase purposes.

Refinancing: When you refinance your debt, you pay off your debt with a new, better loan. By refinancing debt, you could save your business tons of money in avoided interest.

Routing number: A 9-digit number used to identify a financial institution.

SAE (Stand Alone Economic Injury Disaster Loan): provide necessary working capital to enable eligible businesses to overcome the financial impact of a declared disaster without providing assistance for physical disaster loss.

Savings account: An account that has the purpose of saving money and accumulating funds.

SBA: The SBA, or Small Business Administration, is a government entity that helps small businesses secure financing. If you qualify for an SBA loan through an approved lender, then the SBA will be guaranteeing up to 90% of that loan. U.S. Small Business Administration, a government agency dedicated to providing support to small businesses.

SBA 7(a) Loans: SBA 7(a) loans are loans partially guaranteed by the Small Business Administration (SBA). The Small Business Administration is a government agency established to provide assistance in helping, running and growing American small businesses. It offers many loan programs, which can be found here, and is always a great to place to start your search. The SBA itself doesn’t make loans, instead it guarantees a portion of loans, making it less risky for lenders to make loans to small businesses. This means that if you default on the loan, the SBA will step in and reimburse the bank the portion they guaranteed. According to the SBA, this is their most common loan program. This is the SBA’s most common loan program; A 7(a) loan typically offers more flexibility, longer terms, and lower down payments, compared to traditional types of business financing because it is backed by a SBA guarantee. Because it is backed by a SBA guarantee, you can access larger lump sum funding to fund start-up costs, equipment, inventory and working capital.

SBDC: Small Business Development Centers (SBDCs) provide technical assistance to small businesses and aspiring entrepreneurs.  The SBDCs are made up of a collaboration of SBA, state and local governments, and private sector funding resources and are available virtually anywhere with 63 networks branching out with 900+ delivery points throughout the U.S.

SCORE: SCORE is a nonprofit association dedicated to helping small businesses get off the ground, grow and achieve their goals through education and mentorship. SCORE provides mentorship, counseling, tools, and workshops – all free or inexpensive.

Schedule of Liabilities: A business debt schedule that lists all of the debts the business currently owes, including creditor name; original amount due; original due date; current balance; repayment status; maturity date; payment amount and frequency; and how debt is secured.

S-Corporation: A form of corporation, allowed by the IRS for most companies with 35 or fewer shareholders, which enables the company to enjoy the benefits of incorporation but be taxed as if it were a partnership.

Second Lien Debt: This business loan term refers to any loan you take on that’s more subordinate to a more senior loan. In other words, if you have another debt that you need to pay off first, and you take on a second loan, this second loan will be referred to as a second lien debt.

Secured: When used as a small business loan term, secured refers to debt that is taken on with a lien to any of your assets. So, if a loan requires collateral, then that loan is a secured loan.

Secured loan: A loan in which the borrower pledges some asset (for example, a car or property) as collateral for the loan. The collateral becomes a secured debt owed to the creditor who gives the loan. Auto loans are secured loans. A loan where the borrower uses their asset as collateral for the loan. A loan protected by an asset or collateral, to which the lender holds the title.

Service charge: An institution’s fee for a specific service the institution provides.

Security: Often times lenders will require collateral to approve you for a loan. This is a layer of protection for the lender if you default on your payments. The higher the value your collateral is, the more likely you are to be approved. 

Security agreement – A security agreement gives the lender a “security interest” in specific personal property owned by your company. That means that your company pledges that property as “collateral” for the loan. If your company does not repay the loan as required, the lender can seize the “collateral,” sell it, and apply the proceeds to your loan. The lender may take “all assets” of your business (everything your company owns) as collateral. Sometimes the lender requires only certain assets as collateral, such as inventory and accounts receivable or specific vehicles or equipment.

Secured debt: Loan backed by collateral such as a car or property.

Secured Loans: Loans you obtain by putting up collateral, whether a physical asset like equipment or real estate. If you default on a secured loan, the collateral can be seized by the lender to satisfy any part of the loan that has not been paid. Loans can also be secured by the lenders putting a blanket lien (see above) on your business.

Short-Term: Short-term, when referring to debt, means anything that will be paid back in a short amount of time. Literally, short-term refers to debt paid off within a year. However, some short-term lenders still use the term for loans with repayment periods of up to 2 years. As an almost universal rule, short-term financing is easier to secure, quicker to fund, and more expensive than long-term financing.

Short sale: Selling property or security when the recovered money is less than the amount owed.

Simple interest: Interest rate charged on the principal of a loan. The interest on an outstanding balance that produces a declining finance charge with each payment of the installment loan made.

Social Security Administration: The tax-funded federal program which offers retirement benefits and other programs.

Sole Proprietor: An individual who owns an unincorporated business by himself/ or herself.An individual who is the only owner of a business known as a sole proprietorship. That individual is entitled to all of the profits after all liabilities and taxes have been paid.

Soft Credit Check – a credit report check that does not affect an individual’s credit score. This check can happen when an individual checks their own credit report or a potential employer credit report. 

Specialized lender: Traditional loans aren’t right for everybody, especially small business entrepreneurs who are planning on repaying the capital of their loan through income made on their new business. In these scenarios, specialized lenders fill in the gaps, offering flexible funding solutions that make a loan more possible. The SBA is just one example of a specialized lender.

Split deposit: A transaction in which a portion of a deposit is credited to a person’s account and the balance is taken in cash. A split deposit can also be divided between 2 different accounts.

State-specific requirements: Although the SBA is a federal program, certain states may have their own requirements around the specifics of how the 7(a) loan is used, as well as any insurance that’s required with the loan. It’s important to research your state’s specific SBA loan requirements before beginning the SBA 7(a) application process.

Statement of cash flows: A summary of the cash generated and used by a business over a period of time, in operating, investing and financing activities. The statement of cash flows is an important supplement to the income statement, because it accounts for the actual collection of revenue and payment of expenses.

Statements of shareholders’ equity: A financial report that describes the changes in the equity section of a balance sheet in detail.

Stop payment: A verbal or written statement by an account holder stating that he or she no longer wishes to pay a specific check or draft. Once a stop payment is issued, funds cannot be drawn on that check (the check cannot be cashed or deposited).

Student Loan: This comprehensive student loan industry study investigates multiple data sources to reveal the key trends and statistics that define how we finance higher education. Read more

Subprime Borrower: A subprime borrower refers to a borrower who is considered higher risk.

Essentially, if you’re less qualified by traditional standards—i.e. you have a lower credit score—then you’ll be considered a subprime borrower.

Substantial Damage: means uninsured or otherwise uncompensated disaster damages: For homes is either:

40 percent or more of the home’s pre-disaster fair market value (FMV) or replacement cost including the value of any land, whichever is less; or 50 percent or more of the structure’s pre-disaster fair market value or replacement cost, (excluding the value of any land) whichever is less. For businesses is either: 40 percent or more of the aggregate value (lesser of market value or replacement cost at the time of the disaster) of the damaged real property (including the value of any land) and damaged machinery and equipment; or 50 percent or more of the aggregate value (lesser of market value or replacement cost at the time of the disaster) of the damaged real property (excluding the value of any land) and damaged machinery and equipment.

Subsidized loan: A type of need-based loan for which the government pays the interest while the borrower is in school and during the grace deferment periods.

Subsidiary: A company for which a majority of the voting stock is owned by a holding company. For SBA’s purposes, a subsidiary is an affiliate; a company owned or controlled by the applicant business.

Tax lien: The legal claim of a government entity to seize or sell a taxpayer’s assets when an individual or business fails to pay taxes. Besides paying what is owed, a person or business may get rid of a lien by getting the debt dismissed in bankruptcy court or establishing an offer in compromise with tax authorities. If taxes are unpaid for a period of time, a lender may claim the borrower’s property equal to the delinquent taxes.

Tax Refund: An amount owed to or received by a taxpayer from the government resulting from taxation. A tax refund typically occurs when an individual has paid more income tax throughout the year than what was owed, has large tax credits or did not earn enough income to be required to pay tax by law.

Tax Return: A legal form which is completed by a taxpayer to determine tax payable to the government or tax receivable from the government. Tax returns require information about the taxpayer, such as annual income, annual expenses, personal information and financial information, to determine the tax asset or liability.

Term: Period of time between the initial procurement of the loan and the time the loan is to be paid back in full. Lenders often use this word to refer to the amount of time you’ll be repaying your loan for. Loan terms can last as short as 3 months, and as long as 25 years—depending on the kind of financing you’re working with.

Term Loan: A term loan is a lump sum (the “loan amount”) borrowed from a lender and paid off at specified intervals over a set period of time (or “term”). Term loans are typically appropriate for one-time investments in business growth – opening a new storefront, renovating an existing location, hiring new employees, etc. These loans are made to businesses and can be either secured or unsecured. This is the type of loan you usually get from a bank, but there are also some available online. Bank term loans are not frequently awarded to small businesses, but are more frequently granted to mid-size and larger businesses. In fact, according to a survey by First Down Funding, 88 percent of small business loan applications are denied by the banks. However, term loans found online, which usually have shorter terms (one to five years) and higher interest rates (starting at 7 percent) have higher approval rates. A loan that is repaid in regular periodic payments over a specified period of time. Terms can vary depending upon the nature of the loan or the lender and could be as short as three months to several years.

Thrift institution: Financial institutions, such as mutual savings banks, savings and loan associations and credit unions.

Time deposit or CD: A deposit that cannot be withdrawn for a certain period of time without hefty penalties being applied.

Time in business: The amount of time you’ve been in business can affect the likelihood of you receiving a loan. The longer you’ve been in business, the more stable and reliable you’ll look to your lender. 

Total Cost of Capital (TCC): This is the total amount of interest and other fees for the loan. The amount does not include fees and other charges you can avoid, such as late payment fees and returned payment fees.

Traditional Lenders – a financial institution that provides a range of services to consumers. These include the Canadian Big 5 Banks as well as credit unions and smaller banks.

Transaction: An exchange of goods and services.

Transaction limitations: Limits imposed by law on the number of electronic and telephone withdrawals and transfers from a deposit account. Federal law limits electronic and telephone transactions from all U.S. savings and money market accounts to 6 per statement cycle.

Transfer: Funds moved from one account to another.

TransUnion: One of the three major credit bureaus.

Traveler’s checks: A check that functions just like cash and is protected if lost or stolen, often used during travel.

Trend Analysis: A comparative analysis of a company’s financial ratios over time.

Treasury bills: A short-term debt obligation backed by the U.S. government with a maturity of less than 1 year.

Trust: A person who holds property for the benefit of someone else.

UCC lien: A public notice that a lender claims an interest in a debtor’s property, in exchange for a loan.

Underwriting: When a lender underwrites your application, they are accessing the risk they would take on by lending to you. The results of the underwriting process are the decisions of whether or not you qualify for a loan along with the exact terms of your loan if you qualify.

Unsecured: When used as a business loan term, unsecured refers to debt that doesn’t have collateral backing it. Unsecured debt is more risky for the lender and, as result, often more expensive for the borrower. Unsecured loans can also be harder to qualify for due to the fact that there isn’t much security in lending to your business. If you can’t pay back your unsecured business loan, the lender doesn’t have an easy means to recoup their losses like they do with security business loans.

Unsecured loan: A loan that is issued and supported only by the borrower’s creditworthiness, rather than by a type of collateral. An example of an unsecured loan is a regular credit card. A type of loan for which the government doesn’t pay the interest. Borrower is responsible for interest at the moment funds are disbursed. A loan where the borrower is not required to put forth specific collateral to secure the loan. Loans that are approved without the need for collateral. In this case the borrower is approved for the loan based on their credit history and income. An unsecured loan not protected by an asset or collateral, but extended based on the borrowers credit history and financial position. Financing instruments like credit cards and education loans that are not backed by collateral. Unsecured loans involve greater risk for the lender and therefore higher costs and shorter repayment terms for the borrower.

Variable rate: A loan plan in which the interest charged over the life of the loan may vary. Interest rates that are periodically reset. As opposed to a fixed interest rate, variable interest rate is an interest rate that will vary with market interest rates over the life of a business loan.

Veteran: In financial aid terms, it’s a former member of the U.S. armed forces who served on active duty and was not dishonorably discharged.

Veterans Advantage: This is an SBA 7(a) permanent program that specifically aims to support small businesses that are at least 51% owned by a veteran or Active Duty service member, or by their spouse or widow.

W-2 form: Employers issue this IRS form that lists an employee’s wages and tax withheld.

Wire transfer: A method of transferring funds electronically from one person or institution to another.

Working Capital: The amount of current assets that is left after all current debts are paid. Also called current capital, working capital is the cash available to a business for day-to-day operations. Capital used in a company’s daily operations, technically defined as current assets less current liabilities. Working capital is all of your capital that your business uses in it day-to-day transactions. Essentially, it’s how much money your business has, minus the debt it has.

Working Capital Loan – a loan that is taken to finance the daily operations of a company, such as accounts payable and wages.  

Zero fraud liability: The practice of preventing an account holder from being held responsible for charges incurred on a lost or stolen card.

7(a) standard loan: Commonly referred to as just the 7(a), this loan’s designed to help secure funding for small business owners and entrepreneurs. It does this by offering third-party lenders a government-backed guarantee that a predetermined portion of the loan will be repaid in the event of borrower default. This reduces the risk for lenders, making it more likely that they’ll approve a borrower’s loan. The SBA 7(a) loan generally has terms and conditions similar to non-SBA-guaranteed loans.

7(a) loan programs: There are several SBA 7(a) loan programs designed to help small businesses obtain funding. This funding can be used for a business mortgage, purchasing land for new construction, equipment and heavy machinery, repairing existing capital, and for operating expenses. The most common 7(a) loan is the standard 7(a).

7(a) small loan: A 7(a) small loan is an SBA 7(a) loan with a maximum amount of $350,000. It offers a guarantee of 85% for loans of up to $150,000, and 75% for loans between $150,001 and $350,000.

7(a) lender: Banks, credit unions, and other financial institutions can be SBA lenders. The SBA 7(a) lender gives the loan to a qualified borrower, and the SBA guarantees a portion of the loan in case the borrower defaults.

7(a) loan borrower eligibility: To receive an SBA 7(a) loan, a borrower must first be found to be eligible. Eligibility is based on several factors decided by both the lender and the SBA. Borrowers should check eligibility requirements of the specific 7(a) loan program that they’re applying to before submitting the application. Some common eligibility requirements include the intention to operate a for-profit business with the loan capital, reasonable owner equity, a demonstrated need for the loan, and an intent to operate the business within the United States.

7(a) loan disbursement: This is the actual act of paying out the capital of a loan. It may occur as one lump sum, or be disbursed in increments over a set period of time.

7(a) loan down payment: The down payment is the out-of-pocket amount that a small business owner or entrepreneur must contribute to their start-up costs. One of the reasons why SBA 7(a) loans are so attractive is because they offer lower down payment requirements than many other loan programs. Learn more about the SBA 7(a) loan terms here.

5 C’s of Credit – The 5 C’s of Credit, a framework some lenders use to evaluate borrowers; includes: character, collateral, capital, conditions, and capacity. The 5 C’s of Credit is a punchy list of criteria that lenders look at when deciding whether to lend to you. When you apply for funding, a lender will look at your character, capacity, capital, conditions, and collateral to underwrite the risk of lending to you.

401(k): A type of employer-sponsored retirement account where employees may contribute a portion of their salary. Taxes are deferred until money is withdrawn. Certain programs match a percentage of employee contributions.