Small Business Loan Glossary

Plain-English definitions for the 20 terms that come up most often in SBA loan and small business financing conversations. Hand-curated; no fluff.

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Amortization: Repaying a loan in fixed periodic payments that cover both principal and interest. Earlier payments are mostly interest; later payments are mostly principal. Use an SBA loan calculator to see the split month-by-month.→ Use the SBA Loan Calculator
APR(Annual Percentage Rate): The yearly cost of a loan including interest plus most fees, expressed as a percentage. APR is usually higher than the stated interest rate because it includes those fees. Always compare loans by APR, not by base interest rate.→ Estimate APR in the Calculator

Balloon Payment: A large lump-sum payment due at the end of a loan term, after smaller monthly payments have covered only part of the principal. Common on bridge loans and some commercial real estate loans. SBA 7(a) loans typically don't have balloon payments.
Bridge Loan: A short-term loan (typically 6–24 months) used to cover a financing gap, often while waiting for a longer-term loan to close or a sale to complete. Higher interest rate than long-term financing because the lender is taking on short-term risk.→ Compare Bridge Loans
Business Line of Credit(LOC): A revolving credit facility that lets a business draw funds up to a set limit, repay, and re-draw. You only pay interest on what you've drawn. Common for managing cash flow gaps and unexpected expenses.→ Compare Business Lines of Credit

Debt Service Coverage Ratio(DSCR): A lender's measure of cash flow available to pay debt: net operating income divided by total annual debt obligations. Most SBA lenders want a DSCR of at least 1.15, meaning your business generates 15% more cash than its debt payments require.

Equipment Financing: A loan secured by the equipment being purchased — the equipment itself is the collateral. Often available to businesses that don't qualify for unsecured loans because the lender can repossess the equipment if you default.→ Compare Equipment Financing

Factoring(Invoice Factoring): Selling unpaid invoices to a third party (the factor) at a discount in exchange for immediate cash. The factor then collects from your customer directly. Common for B2B businesses with long payment cycles.→ Compare Invoice Factoring

Merchant Cash Advance(MCA): An advance against future credit card or business revenue, repaid via a daily or weekly percentage of incoming sales. Fast funding (1–3 days), but factor rates are higher than traditional loans (often equivalent to 40–150% APR).→ Compare MCAs

Personal Guarantee: A signed agreement making the business owner personally liable for repayment if the business defaults. Required for most SBA loans and many alternative loans. Means the lender can pursue your personal assets (including your home, in some cases) if the business can't pay.
Prepayment Penalty: A fee charged for paying off a loan early. SBA 7(a) loans have a tiered prepayment penalty in the first 3 years on terms of 15+ years. Many alternative loans (lines of credit, term loans under 10 years) have no prepayment penalty.
Prime Rate: The interest rate that commercial banks charge their most creditworthy customers. Many SBA loans are priced as Prime + a margin (e.g., Prime + 2.75%). The Wall Street Journal Prime Rate is the most commonly cited benchmark.

Revenue-Based Financing(RBF): A loan repaid as a fixed percentage of monthly revenue. No fixed monthly payment — when revenue drops, payments drop. Best for businesses with consistent monthly revenue ($10K+/month) but irregular cash flow.→ See How It Compares

SBA 504 Loan: An SBA loan program for fixed-asset purchases (real estate, heavy equipment). Funded jointly by a bank (50%), a Certified Development Company (40%), with the borrower contributing the remaining 10%. Lower blended rate (~6–7%) than 7(a) but limited to fixed assets.
SBA 7(a) Loan: The SBA's most popular program. General-purpose loans up to $5M, partially guaranteed by the SBA, with terms up to 25 years. Used for working capital, equipment, debt refinancing, and business acquisition. Approval typically takes 60–90 days.→ SBA 7(a) Guide
SBA Express: An SBA 7(a) variant with a faster approval process — the SBA responds to lender applications within 36 hours. Maximum loan amount $500K. Lower SBA guarantee (50%) means the lender takes more risk, so credit standards are often higher.→ SBA 7(a) Guide
SBA Guarantee Fee: A one-time fee (currently 2.0%–3.75% of the guaranteed portion) the SBA charges on most 7(a) and 504 loans to cover the cost of guaranteeing the loan to the lender. Often financed into the loan rather than paid up front.→ SBA 7(a) Guide

Term Loan: A loan repaid in fixed installments over a set period, typically 1–10 years. Predictable monthly payment, common for one-time investments like equipment, expansion, or business acquisition. Bank term loans often have lower rates than alternative term loans.→ Compare Term Loans

UCC Filing(UCC-1 Lien): A public notice a lender files claiming a security interest in your business assets. A 'blanket' UCC-1 covers all business assets; a 'specific' UCC-1 covers only named assets. Common on term loans and lines of credit. Multiple UCC-1 liens from different lenders can complicate future financing.

Working Capital: Cash a business uses for day-to-day operations — rent, payroll, inventory, supplies. Distinct from capital used for long-term investments like equipment or real estate. Working capital loans cover short-term operational needs and typically have shorter repayment terms.

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