Business Loan Glossary | Key Financing Terms Explained | Sprout SBF | Biloxi, MS
Understanding the language of business lending is essential before you apply for any type of financing. This glossary is designed to give small business owners a plain-language reference for the most common terms they will encounter when working with lenders, reviewing loan agreements, or consulting with our team. If you have questions about any of these terms as they apply to your situation, contact us directly.
A
Amortization The process of spreading loan payments over a set period of time. An amortization schedule shows how each payment is divided between interest and principal across the life of the loan.
Alternative Lender A non-bank financing source that offers business loans, lines of credit, or other capital products. Alternative lenders often have more flexible eligibility requirements than traditional banks and can fund faster.
Annual Percentage Rate (APR) The total annual cost of borrowing, expressed as a percentage. APR includes the interest rate plus any associated fees, making it a more complete measure of loan cost than the interest rate alone.
Accounts Receivable Financing A type of funding that allows businesses to borrow against outstanding invoices. Also known as invoice financing or factoring, this option provides fast access to capital tied up in unpaid customer balances.
B
Business Credit Score A numerical score assigned to a business based on its credit history, payment behavior, and financial obligations. Credit scores for businesses are evaluated separately from personal credit scores and are used by lenders to assess lending risk.
Business Line of Credit A revolving credit product that allows businesses to draw funds as needed up to a set limit, repay the balance, and draw again. It functions similarly to a credit card but typically offers higher limits and lower rates. See our Business Line of Credit page for more information.
Business Term Loan A lump-sum loan repaid over a fixed period with scheduled payments. Business term loans are one of the most common forms of small business financing and are used for a wide range of purposes.
Bridge Loan A short-term loan used to cover immediate capital needs while a longer-term financing solution is being arranged. Bridge loans are common in real estate transactions and business acquisitions.
C
Collateral An asset pledged by the borrower to secure a loan. If the borrower defaults, the lender may seize the collateral to recover the outstanding balance. Common collateral types include real estate, equipment, and accounts receivable.
Commercial Real Estate Loan A loan used to purchase, refinance, or renovate commercial property. This includes office buildings, retail spaces, warehouses, and multi-unit residential properties. See our Commercial Real Estate Loans page for details.
Credit Utilization The percentage of available credit currently in use. High credit utilization can negatively impact both personal and business credit scores. Lenders generally prefer to see utilization below 30 percent.
Conventional Loan A business or commercial loan issued by a bank or financial institution without government backing. Conventional loans typically require strong credit and full documentation.
D
DSCR (Debt Service Coverage Ratio) A financial metric used by lenders to evaluate a borrower’s ability to repay debt. It is calculated by dividing net operating income by total debt service. A DSCR above 1.25 is generally considered acceptable by most SBA and conventional lenders.
Default Failure to meet the repayment obligations of a loan agreement. Defaulting on a business loan can result in lender collection actions, damage to credit scores, and loss of collateral.
Draw Period The timeframe during which a borrower can access funds from a line of credit. After the draw period ends, the borrower enters the repayment period and can no longer withdraw additional funds.
E
Equipment Financing A loan or lease used specifically to purchase or rent business equipment. The equipment itself typically serves as collateral, making this type of financing accessible to businesses with limited credit history.
Equity The ownership stake or net value a business owner holds in their business or property. Lenders sometimes require equity as a condition of financing, particularly for SBA 504 loans and commercial real estate transactions.
F
Fixed Rate An interest rate that does not change for the life of the loan. Fixed-rate loans provide predictable monthly payments and protect borrowers from market rate increases.
Factoring The sale of a business’s outstanding invoices to a third party at a discount in exchange for immediate cash. Factoring is not technically a loan, but it provides fast liquidity for businesses with strong receivables and slow-paying customers.
Funding Profile The overall picture a lender forms of a borrower based on credit, revenue, business history, collateral, and purpose. A strong funding profile significantly increases the likelihood of loan approval at favorable terms.
G
Gross Revenue Total business income before expenses. Lenders use gross revenue as a key indicator of a business’s ability to support loan repayments.
Guarantor A person who agrees to repay a loan if the primary borrower defaults. SBA loans typically require a personal guarantee from anyone who owns 20 percent or more of the business.
H
Hard Money Loan A short-term loan secured by real property, typically issued by private lenders rather than banks. Hard money loans are often used by real estate investors who need fast funding and cannot qualify for conventional financing.
L
Lien A legal claim placed on an asset as security for a debt. If a borrower defaults, the lienholder has the right to take possession of the asset to recover the outstanding balance.
Loan Broker A professional who acts as an intermediary between borrowers and lenders. A loan broker like Sprout SBF helps businesses identify the right financing options, prepare applications, and navigate the approval process. Learn more on our About Us page.
Loan-to-Value Ratio (LTV) The ratio of a loan amount to the appraised value of the collateral. Lenders use LTV to assess risk; lower ratios indicate lower risk and typically result in better loan terms.
M
Merchant Cash Advance (MCA) An advance on future business sales, typically repaid through a percentage of daily credit card transactions. MCAs are fast and flexible but often carry higher costs than traditional loans.
Microloan A small loan, typically under $50,000, designed for startups and small businesses that need modest amounts of capital. The SBA Microloan program is a common source of this type of financing.
N
Net Operating Income (NOI) Revenue generated by a business or property after operating expenses, excluding debt service, taxes, and depreciation. NOI is a key figure in calculating DSCR for commercial loan applications.
P
Personal Guarantee A legal agreement in which a business owner personally accepts responsibility for a business loan if the business cannot repay it. Most SBA loans and many conventional business loans require a personal guarantee.
Principal The original loan amount borrowed, separate from interest and fees. Loan payments are applied to both principal and interest over the repayment period.
R
Revolving Credit A credit arrangement that allows borrowers to draw, repay, and redraw funds up to a set credit limit. Business lines of credit are the most common form of revolving credit for small businesses.
S
SBA (Small Business Administration) A U.S. government agency that supports small businesses through loan guarantees, counseling, and other programs. SBA loans are not issued directly by the government but are made by approved lenders with SBA backing. See our SBA Loan Programs page for more information.
Startup Business Loan A loan designed for businesses in the early stages of operation. Startup loans often rely on personal credit, business plans, and projected revenue rather than historical financials.
Secured Loan A loan backed by collateral. If the borrower defaults, the lender can claim the collateral to recover the debt.
T
Term Loan A loan repaid over a fixed period with scheduled payments. Terms can range from one year to twenty-five years depending on the loan type and lender.
Time in Business The length of time a business has been operating. Most lenders require a minimum of six months to two years in business before approving a loan application.
U
Underwriting The lender’s process of evaluating a loan application to determine creditworthiness, risk, and repayment ability. Underwriting reviews credit history, financial statements, collateral, and the purpose of the loan.
Unsecured Loan A loan not backed by collateral. Unsecured loans rely more heavily on credit scores and financial history, and typically carry higher interest rates to offset lender risk.
W
Working Capital The funds a business uses for day-to-day operations. Working capital loans are short-term financing solutions designed to cover operational expenses such as payroll, inventory, and overhead. Visit our Working Capital Loans page for more.
Have questions about how these terms apply to your loan? Review our FAQ page or Contact Us for a personalized conversation.
Call: (228) 860-1422 Email: Getsproutsbf@gmail.com
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Keep an eye on this page for upcoming events where you can find the Sprout SBF team, learn more about our services, and connect with fellow small business owners across Biloxi and the greater Gulf Coast area. To learn more about local events visit: Free Mississippi Events.
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Sprout SBF — Financial Consultant & Loan Agency | Biloxi, MS
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