Understanding business funding terminology is essential for making informed financing decisions. This glossary covers the most important terms you will encounter when applying for business loans, MCAs, and other funding products.
Money owed to a business by its clients for goods or services delivered but not yet paid for. AR is the basis for invoice factoring.
The annualized cost of borrowing, including fees and interest. Used to compare the true cost of different loan products.
Short-term financing used to bridge a gap until longer-term funding is secured or a financial obligation is met.
A revolving credit facility that allows a business to draw funds up to a set limit, pay them back, and draw again.
An asset pledged as security for a loan. If the borrower defaults, the lender can seize the collateral. Not required for MCAs and many alternative loans.
Failure to meet the terms of a loan agreement, typically by missing payments. Can result in legal action and damaged credit.
A loan or lease specifically for purchasing business equipment, where the equipment itself serves as collateral.
A multiplier used in MCAs to determine total repayment. A factor rate of 1.3 on a $50,000 advance means $65,000 total repayment.
The percentage of daily credit card sales withheld by an MCA provider for repayment, typically 10-20%.
Selling unpaid invoices to a third party (factor) at a discount in exchange for immediate cash.
A legal claim on a business asset that serves as security for a debt. UCC liens are common in business lending.
A lump sum of capital provided in exchange for a percentage of future credit card sales or bank deposits.
Payment terms indicating the number of days a client has to pay an invoice. Net-30 means payment is due within 30 days.
A one-time fee charged by a lender for processing a new loan, typically 1-5% of the loan amount.
A commitment by a business owner to personally repay a business loan if the business cannot. Required by most lenders.
A fee charged for paying off a loan early. Not all lenders charge this, always ask before signing.
A loan where repayment is a fixed percentage of monthly revenue, adjusting with business performance.
A business loan partially guaranteed by the U.S. Small Business Administration, offering lower rates and longer terms.
A loan backed by collateral. Offers lower rates but puts assets at risk if the borrower defaults.
A loan with a fixed repayment schedule over a set period (term), typically 1 to 5 years.
A Uniform Commercial Code filing that gives a lender a legal interest in a borrower’s business assets. Common with MCAs.
The process by which a lender evaluates a loan application, assessing risk, creditworthiness, and ability to repay.
A loan that does not require collateral. Approval is based on creditworthiness and business performance.
The money available for day-to-day business operations, calculated as current assets minus current liabilities.
