Financing glossary
Business financing,
in plain English.
The terms lenders use, what they mean for your business, and the calculator that puts each one to work.
A
- Amortization
Repaying a loan in regular payments that cover interest and part of the balance, so the loan reaches zero at the end of the term. Early payments are mostly interest; later ones mostly principal.
- APR (annual percentage rate)
The yearly cost of borrowing including upfront fees, not just interest. Because it puts different offers on the same yearly scale, it is the best single number for comparing them.
B
- Balloon payment
A large final payment due at the end of a loan whose regular payments didn’t fully repay it. It lowers payments during the term but needs a plan — cash or refinancing — for the end.
- Break-even point
The sales a business needs to cover all its costs, with nothing left over. A new loan payment raises it, because each month’s sales must also cover the payment.
C
- Collateral
Property a lender can claim if a loan isn’t repaid — equipment, real estate, inventory or receivables. Collateral can lower the rate or raise the amount, but doesn’t replace the need to show repayment ability.
- Contribution margin
What each sale leaves after its variable costs, available to cover fixed costs and profit. Price minus variable cost per unit.
- Cost of capital
Everything financing costs you: interest, fees and, for advances, the difference between what you receive and what you repay. Compare it in dollars and as a yearly rate.
D
- Draw
Taking money from a line of credit. You pay interest only on what you draw, and some lenders charge a fee on each draw.
- DSCR (debt service coverage ratio)
Cash available for debt divided by debt payments. A DSCR of 1.25 means $1.25 of income for every $1 of payments — a benchmark many lenders use.
F
- Factor rate
A multiplier that sets the total repaid on a merchant cash advance or similar product: 1.30 on $50,000 means repaying $65,000. It ignores time, so convert it to an APR before comparing.
- Fixed rate
An interest rate that stays the same for the whole loan, so payments are predictable.
G
- Guaranty fee (SBA)
An upfront fee on the SBA-guaranteed part of a 7(a) loan. SBA sets it each fiscal year by loan size; it is often paid from the loan proceeds.
H
- Holdback
The share of each day’s card sales a merchant cash advance provider keeps until the advance is repaid. A higher holdback repays faster and raises the cost per year.
I
- Interest rate
The yearly percentage charged on the balance you still owe. It sets the payment but leaves out fees — the APR adds those.
- Invoice factoring
Selling unpaid customer invoices to a factoring company for most of their value now, and the rest — minus fees — when the customer pays.
Invoice factoring calculator →Invoice factoring vs line of credit →
L
- Line of credit
A revolving credit limit you draw from as needed, repay, and draw again. Interest applies only to what you use.
Business lines of credit →Line of credit vs merchant cash advance →
M
- Merchant cash advance
Cash now in exchange for a fixed amount of future sales, repaid through daily or weekly debits or a share of card sales. Fast and flexible on credit, but usually expensive per year.
Factor rate calculator →Merchant cash advance vs term loan →
N
- Net operating income (NOI)
What a business earns after operating costs and before loan payments. Lenders compare it with debt payments to judge how much the business can carry.
O
- Origination fee
A one-time fee for setting up a loan, often a percentage of the amount and taken from the proceeds. It raises the APR above the interest rate.
P
- Personal guarantee
A promise by an owner to repay a business debt personally if the business can’t. Common on small business loans; SBA requires one from owners of 20% or more.
- Prepayment penalty
A fee for repaying a loan early, meant to recover interest the lender expected to earn. Check whether one applies before you refinance or pay off.
- Prime rate
A benchmark rate banks use to price variable-rate loans. Many SBA and bank loans are quoted as prime plus a margin, so their rate moves when prime changes.
R
- Recourse factoring
Factoring where you must buy back an invoice your customer doesn’t pay. Non-recourse factoring shifts some of that risk to the factor, usually for a higher fee.
- Revenue-based financing
Funding repaid as a percentage of monthly revenue until a set total is reached, so payments rise and fall with sales.
S
- SBA 7(a) loan
The Small Business Administration’s main loan program. A bank or other lender makes the loan and SBA guarantees part of it, allowing longer terms and capped rates for businesses that qualify.
T
- Term loan
A lump sum repaid in regular payments over a set term, usually at a fixed rate. Fits defined investments with a clear payback.
U
- UCC lien
A public filing that gives a lender or advance provider a claim on business assets until the debt is repaid. It can affect other financing, so ask what is filed and when it is released.
- Underwriting
A lender’s review of your application — revenue, credit, time in business, collateral and documents — to decide whether to lend, how much and on what terms.
V
- Variable rate
An interest rate that changes with a benchmark such as the prime rate, so payments can rise or fall over the loan.
W
- Working capital
The cash a business has for day-to-day operations — current assets minus current liabilities. Financing can bridge gaps between paying suppliers and getting paid.
Definitions are general explanations for education, not legal, tax or financial advice. Terms and requirements vary by lender and product. ScaleKit Financing is operated by Arch Ventures LLC and is not a lender.