The world of commercial lending is full of specialized jargon and easily confused abbreviations.

Here, we’ll demystify 26 tricky terms you’re likely to encounter as a small-business borrower:

If a borrower takes out a $500,000 loan to purchase a property valued at $1 million, the LTV would be 50%.

  1. ABL (Asset-Based Lending)
    A type of commercial lending that is secured by the borrower’s assets, such as inventory or accounts receivable, rather than by their creditworthiness.
  1. Acceleration
    The right of a lender to demand immediate repayment of a loan in the event of default. Acceleration clauses are often included in loan agreements to protect lenders against borrower default.
  1. Amortization
    The process of paying off a loan over time through regular payments that include both principal and interest.
  1. Basis point (“Bip”)
    A unit of measurement used in finance to express small changes in interest rates or other financial variables. One basis point is equal to 1/100th of a percentage point.
  1. Blanket Lien
    A type of security interest that gives the lender the right to seize any and all of the borrower’s assets in the event of default.
  1. Bridge Loan
    A short-term loan that is used to span a gap between two longer-term financing arrangements.
  1. Capitalization Rate
    A measure of the rate of return on an investment property based on the net operating income it generates.
  1. Cognovit Note
    A type of promissory note that includes a clause allowing the lender to obtain a judgment against the borrower without notice or a hearing in the event of default.
  1. Defeasance
    A process by which a borrower can release the collateral securing a loan by providing substitute collateral, typically in the form of U.S. Treasury bonds.
  1. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
    A measure of a company’s financial performance that excludes certain expenses to provide a clearer picture of its operating profitability.
  1. Exit Fee
    A fee charged by a lender when a borrower pays off a loan early, usually to compensate the lender for lost interest income. See Prepayment Penalty.
  1. FICO SBSS (Fair Isaac Corporation Small Business Scoring Service)
    A credit scoring model used by the Small Business Administration to evaluate the creditworthiness of small businesses applying for loans.
  1. LTV (Loan-to-Value)
    A ratio that expresses the size of a loan relative to the value of the asset being used as collateral. For example, if a borrower takes out a $500,000 loan to purchase a property valued at $1 million, the LTV would be 50%.
  1. MCA (Merchant Cash Advance
    A type of financing in which a lender provides a lump sum payment to a business in exchange for a percentage of its future sales. MCA financing is typically used by businesses that have irregular cash flows or do not qualify for traditional loans.
  1. Origination Fee
    A fee charged by a lender to cover the costs associated with processing a loan application and disbursing funds. Origination fees are typically a percentage of the loan amount.
  1. Personal Guarantee
    A legal agreement in which an individual agrees to be personally responsible for the repayment of a business loan in the event that the business is unable to repay the loan.
  1. Prepayment Penalty
    A fee charged by a lender when a borrower pays off a loan before its scheduled maturity date. Prepayment penalties are typically intended to compensate the lender for lost interest income. See Exit Fee.
  1. Prime Rate
    The interest rate that commercial banks charge their most creditworthy customers, typically large corporations. The prime rate is used as a benchmark for the interest rates on many other types of loans, including business loans.
  1. Recourse Loan
    A type of loan in which the lender has the right to pursue the borrower’s assets beyond the collateral identified in the loan agreement, in the event of default.
  1. Revolving Line of Credit
    A type of business loan that provides the borrower with access to a preapproved credit limit that can be drawn upon as needed. Repayments are made over time, and the credit line is replenished as the borrower pays down the balance.
  1. SBA (Small Business Administration)
    A U.S. government agency that provides support, including loan guarantees and other forms of financial assistance, to small businesses.
  1. TCC (Total Cost of Credit)
    The total amount of interest and fees charged on a loan over its entire term. TCC includes both the interest rate and any additional costs associated with the loan, such as origination fees or prepayment penalties.
  1. Term Loan
    A type of business loan that is repaid in regular installments over a set period of time, usually several years.
  1. Underwriting
    The process of evaluating a borrower’s creditworthiness and financial condition to determine whether to approve a loan and on what terms.
  1. Working Capital
    The funds that a business uses to finance its day-to-day operations, such as paying bills and meeting payroll. Working capital can be generated from a variety of sources, including loans and lines of credit.
  1. Zombie Debt
    A type of debt that has been written off or is otherwise uncollectible, but that a debt collector continues to pursue in the hopes of collecting payment.

Defining Success

If you’re ready to put your knowledge into action, consult your financial institution.

 

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