Understand the terminology used in business financing. 73+ terms explained in plain language to help you make informed funding decisions.
ACH is an electronic network used to process financial transactions, including direct deposits and bill payments. In business funding, ACH payments are commonly used to automatically debit daily or weekly repayments from a borrower's bank account. This method is standard for merchant cash advances and revenue based financing.
Accounts receivable refers to the money owed to a business by its customers for goods or services already delivered. These outstanding invoices can be used as collateral or sold to a factoring company to obtain immediate cash. Invoice factoring is specifically designed to turn receivables into working capital.
Amortization is the process of spreading a loan repayment over a fixed schedule of regular payments. Each payment covers both principal and interest, with the interest portion decreasing over time as the balance shrinks. Understanding amortization helps business owners see exactly how much of each payment goes toward the actual debt versus financing costs.
APR represents the true yearly cost of borrowing money, expressed as a percentage. It includes the interest rate plus any additional fees or charges, giving borrowers a standardized way to compare different funding options. APR is especially useful when comparing products like business lines of credit and working capital loans.
An application fee is a charge some lenders require when you submit a funding request. This fee covers the cost of processing your application, pulling credit reports, and reviewing your business documents. Many alternative lenders, including Merchant Fund Express, do not charge application fees.
The advance rate is the percentage of an asset's value that a lender will provide as funding. For example, in invoice factoring, the advance rate is typically 80-90% of the invoice value. The remaining percentage is held in reserve and released (minus fees) once the customer pays.
Alternative lending refers to business financing provided by non-bank institutions, including online lenders, fintech companies, and funding brokers. These lenders often have faster approval times, more flexible requirements, and serve businesses that may not qualify for traditional bank loans. Products like merchant cash advances and revenue based financing are common alternative lending options.
Bad credit generally refers to a personal or business credit score below 600, indicating a history of missed payments, defaults, or high debt utilization. While bad credit can limit access to traditional bank loans, many alternative funding options like merchant cash advances focus more on business revenue than credit scores. Rebuilding credit takes time but is possible through consistent on-time payments.
A balloon payment is a large lump-sum payment due at the end of a loan term after a series of smaller regular payments. This structure keeps monthly payments low but requires the borrower to pay a significant amount at maturity. Balloon payments are more common in real estate and equipment financing than in short-term business funding.
Bank statement loans are a type of financing where the lender reviews your recent bank statements (typically 3-6 months) instead of relying heavily on credit scores or tax returns. This approach helps businesses with strong cash flow but limited documentation qualify for funding. It is one of the most common underwriting methods in alternative business lending.
A bridge loan is short-term financing designed to cover a temporary cash gap until longer-term funding is secured. These loans typically last a few weeks to a few months and carry higher interest rates due to their short duration. Business owners often use bridge loans to seize time-sensitive opportunities or cover expenses during seasonal slowdowns.
A business credit score is a numerical rating that reflects a company's creditworthiness, typically ranging from 0 to 100 (Dun & Bradstreet PAYDEX) or 1 to 100 (Experian Intelliscore). It is calculated based on payment history, credit utilization, company size, and public records. A strong business credit score can help you qualify for better rates and higher funding amounts.
A business line of credit is a flexible funding option that gives you access to a set amount of capital you can draw from as needed. You only pay interest on the amount you actually use, and as you repay, those funds become available again. It is ideal for managing cash flow gaps, covering unexpected expenses, or taking advantage of growth opportunities.
Capital refers to the financial resources a business uses to fund its operations, growth, and investments. It can come from personal savings, investors, retained earnings, or external funding sources like loans and lines of credit. Having adequate working capital is essential for day-to-day business operations.
Cash flow is the movement of money into and out of a business over a given period. Positive cash flow means more money is coming in than going out, while negative cash flow signals potential financial trouble. Lenders closely examine cash flow when evaluating funding applications because it indicates a business's ability to make repayments.
Collateral is an asset pledged by a borrower to secure a loan, such as equipment, real estate, inventory, or accounts receivable. If the borrower defaults, the lender can seize the collateral to recover losses. Many alternative funding products like MCAs do not require traditional collateral, relying instead on future revenue.
A credit score is a three-digit number (typically 300-850 for personal scores) that represents your creditworthiness based on your borrowing and repayment history. Lenders use credit scores to assess the risk of lending to you and to determine rates and terms. While traditional banks often require scores above 680, alternative lenders may work with scores as low as 500.
A soft credit pull is a preliminary check that does not affect your credit score and is used for pre-qualification. A hard credit pull is a formal inquiry that can temporarily lower your score by a few points and is typically done when you formally apply for funding. Many alternative lenders start with a soft pull to give you options before committing to a hard inquiry.
Closing costs are fees charged at the time a loan or funding agreement is finalized. These can include origination fees, documentation fees, legal fees, and UCC filing fees. It is important to factor closing costs into your total cost of borrowing when comparing funding offers.
A daily payment structure requires the borrower to make small repayments every business day, typically via ACH debit from their bank account. This is the standard repayment method for merchant cash advances and some revenue based financing products. Daily payments reduce the lender's risk and can be easier for businesses with consistent daily revenue to manage.
DSCR measures a business's ability to cover its debt payments with its operating income. It is calculated by dividing net operating income by total debt service (principal + interest). A DSCR above 1.25 is generally considered healthy, meaning the business earns 25% more than needed to cover its debt obligations.
Default occurs when a borrower fails to meet the repayment terms of a funding agreement, such as missing payments or violating contract conditions. Defaulting can trigger penalties, collection actions, and damage to both personal and business credit scores. If you are struggling with payments, it is better to contact your funder proactively to discuss modified terms.
A down payment is an upfront cash payment made when purchasing an asset, reducing the total amount that needs to be financed. In equipment financing, a down payment of 10-20% is common and can help secure better rates. Not all business funding products require a down payment.
Equipment financing is a type of business funding specifically designed to help purchase machinery, vehicles, technology, or other business equipment. The equipment itself typically serves as collateral, which often means easier qualification and competitive rates. Terms usually range from 12 to 60 months depending on the equipment's useful life.
Equity represents the ownership value in a business or asset after subtracting any debts or liabilities. Business owners can leverage equity to secure financing or attract investors. Unlike debt financing, equity financing involves giving up a portion of ownership rather than taking on repayment obligations.
A factor rate is a decimal number (typically 1.1 to 1.5) used to calculate the total repayment amount on a merchant cash advance or short-term funding product. To find your total payback, multiply the funded amount by the factor rate. For example, a $50,000 advance with a 1.3 factor rate means you repay $65,000 total.
Factoring (also called invoice factoring) is a funding method where a business sells its unpaid invoices to a factoring company at a discount in exchange for immediate cash. The factoring company then collects payment directly from the business's customers. This is an effective solution for B2B companies that need to improve cash flow without taking on traditional debt.
A fixed rate means the interest rate or cost of borrowing remains the same throughout the entire term of the funding agreement. This gives borrowers predictable payments and protection against rate increases. Fixed rates are common in term loans and equipment financing.
The funding amount is the total sum of money provided to a business through a loan, advance, or other financing product. Funding amounts are determined based on factors like monthly revenue, credit history, time in business, and industry type. At Merchant Fund Express, funding amounts typically range from $5,000 to $2,000,000 depending on the product.
A grace period is a set amount of time after a payment due date during which the borrower can make a payment without incurring a late fee or penalty. Not all business funding products include a grace period, so it is important to read your agreement carefully. Grace periods are more common with traditional bank loans and business lines of credit.
Gross revenue is the total income a business generates from all sources before deducting any expenses, taxes, or costs. Lenders use gross revenue (often from bank statements) as a primary metric to determine how much funding a business can handle. Higher gross revenue generally means access to larger funding amounts and better terms.
A personal guarantee is a legal commitment by a business owner to repay a business debt using personal assets if the business cannot. Most small business funding products require a personal guarantee from owners with 20% or more ownership. This gives lenders additional security and is standard practice across the industry.
A holdback is the percentage of daily or weekly revenue that is withheld to repay a merchant cash advance or revenue based financing agreement. For example, a 10% holdback means 10% of each day's deposits goes toward repayment. The holdback percentage is set at the beginning of the agreement and directly affects how quickly the advance is repaid.
A hard money loan is asset-based financing where the loan is secured primarily by the value of a physical asset, usually real estate. These loans have shorter terms and higher rates than conventional loans but can close very quickly. They are often used by businesses or investors who need fast capital and have valuable collateral.
An interest rate is the percentage charged by a lender on the outstanding balance of a loan, expressed as an annual figure. Interest rates can be fixed (staying the same) or variable (changing with market conditions). Comparing interest rates across different funding products helps business owners find the most cost-effective option.
Invoice factoring allows businesses to sell their outstanding invoices to a third party (the factor) at a discount for immediate cash. The factor advances 80-90% of the invoice value upfront and pays the remainder (minus fees) when the customer pays. This is not a loan; it is a sale of an asset, which means it does not add debt to your balance sheet.
An ITIN is a tax processing number issued by the IRS to individuals who are required to have a U.S. taxpayer identification number but are not eligible for a Social Security Number. Business owners with an ITIN can still access many types of business funding, including merchant cash advances and revenue based financing. ITIN holders are not eligible for SBA loans but have several alternative funding paths available.
A junior lien is a claim on an asset that ranks below a senior (first-position) lien in priority. If a borrower defaults, the senior lien holder gets paid first from the asset's value. Junior liens carry more risk for lenders, which typically results in higher interest rates for the borrower.
KYC is a set of verification procedures lenders use to confirm a borrower's identity and assess potential risks before providing funding. This typically involves reviewing government-issued ID, business documentation, and ownership information. KYC compliance is a standard part of the application process for virtually all business funding products.
A lien is a legal claim a lender places on a borrower's assets as security for a debt. Common types include UCC liens on business assets and liens on specific equipment or property. Liens remain in effect until the debt is fully repaid, at which point the lender is required to release the lien.
A line of credit provides a business with access to a predetermined amount of funds that can be drawn upon as needed. Unlike a term loan, you only pay interest on the amount currently borrowed, and repaid funds become available to borrow again. Lines of credit are ideal for managing seasonal fluctuations, inventory purchases, and unexpected expenses.
Loan-to-value ratio compares the amount of funding requested to the appraised value of the asset being used as collateral. For example, if you are financing $80,000 worth of equipment valued at $100,000, your LTV is 80%. Lower LTV ratios generally result in better rates and terms because the lender takes on less risk.
The maturity date is the deadline by which a loan or funding agreement must be fully repaid. After this date, any remaining balance may be subject to penalties or default provisions. Maturity dates range from a few months for short-term products to several years for equipment financing.
A merchant cash advance provides a lump sum of capital in exchange for a percentage of future credit card sales or daily bank deposits. MCAs use a factor rate rather than an interest rate and are repaid through automatic daily or weekly debits. They are popular among businesses that need fast funding and may not qualify for traditional loans.
Monthly revenue is the total amount of income a business generates in a single month. Lenders use monthly revenue as a key metric to determine funding eligibility and repayment capacity. Most alternative funding products require a minimum monthly revenue, often between $10,000 and $15,000, to qualify.
A merchant account is a type of bank account that allows a business to accept credit and debit card payments from customers. Some funding products, particularly traditional MCAs based on credit card splits, require an active merchant account. Businesses without merchant accounts can still qualify for ACH-based funding products.
Net revenue is the income remaining after subtracting returns, allowances, and discounts from gross revenue. It provides a more accurate picture of a business's actual earnings than gross revenue alone. Some lenders use net revenue rather than gross revenue when calculating funding amounts and repayment ability.
Non-recourse funding means the lender can only collect from the specified collateral or revenue stream if the borrower defaults, not from the borrower's other personal or business assets. True non-recourse funding is relatively rare in small business financing. Most funding agreements include at least some recourse provisions, so it is important to read the terms carefully.
An origination fee is a one-time charge by the lender for processing and funding a loan, typically expressed as a percentage of the total funding amount (usually 1-5%). This fee is often deducted from the funded amount before disbursement. When comparing funding offers, always factor in origination fees to understand your true cost of capital.
An overdraft occurs when a bank account balance goes below zero, meaning more money has been withdrawn than is available. Frequent overdrafts on your business bank statements can be a red flag for lenders and may reduce your chances of approval. Maintaining a positive average daily balance strengthens your funding applications.
The payback amount is the total sum a borrower must repay, including the original funding amount plus all fees, interest, or factor rate charges. For a merchant cash advance, the payback amount is calculated by multiplying the advance by the factor rate. Understanding your total payback amount is essential for evaluating whether a funding offer makes financial sense for your business.
A personal guarantee is a legal agreement where a business owner pledges personal assets to back a business funding obligation. If the business cannot make payments, the lender can pursue the guarantor's personal assets, including bank accounts, property, and other holdings. Nearly all small business funding products require a personal guarantee from majority owners.
A prepayment penalty is a fee charged when a borrower pays off a funding agreement before the scheduled maturity date. Not all funding products include prepayment penalties; some even offer discounts for early payoff. Always ask about prepayment terms before signing a funding agreement so you understand your options.
The principal is the original amount of money borrowed or funded, not including interest or fees. As you make payments, a portion goes toward reducing the principal while the rest covers interest or financing costs. Paying down principal faster reduces the total cost of borrowing over the life of the agreement.
Position refers to the priority ranking of a funder's claim on a borrower's revenue or assets. A first-position funder gets repaid before second and third-position funders. Taking on multiple positions (stacking) increases repayment burden and is generally discouraged by responsible funders.
Refinancing involves replacing an existing funding agreement with a new one, typically to secure better terms, lower payments, or access additional capital. In business funding, refinancing an MCA or term loan can reduce your daily payment burden if your business performance has improved. It is important to calculate the total cost of the new agreement to ensure refinancing truly saves money.
A renewal is a new funding agreement offered to a borrower who has partially or fully repaid an existing one. Renewals often come with better terms due to the established payment history between the borrower and funder. Some funders offer renewal options once 50-60% of the original balance has been repaid.
Revenue based financing provides capital to businesses in exchange for a fixed percentage of future revenue until a predetermined amount is repaid. Unlike MCAs that split credit card sales, RBF typically uses fixed daily or weekly ACH payments debited from the business bank account. RBF is popular among businesses with strong, consistent revenue that prefer predictable repayment schedules.
Revolving credit is a type of financing where the borrower has a set credit limit and can borrow, repay, and borrow again without reapplying. A business line of credit is the most common form of revolving credit for businesses. This flexibility makes revolving credit ideal for ongoing operational needs and unpredictable expenses.
SBA loans are government-backed loans administered through the Small Business Administration and issued by participating banks and lenders. They offer some of the lowest rates and longest terms available but have strict eligibility requirements and lengthy approval processes (often 60-90 days). SBA loans are not available to ITIN holders or non-citizens without permanent residency.
A secured loan requires the borrower to pledge specific assets (collateral) to guarantee repayment. Common collateral includes real estate, equipment, inventory, or accounts receivable. Secured loans generally offer lower interest rates than unsecured options because the lender has a tangible asset to recover if the borrower defaults.
Stacking refers to the practice of taking multiple cash advances or loans simultaneously from different funders. This creates a heavy repayment burden with multiple daily debits and significantly increases the risk of default. Most reputable funders discourage stacking and may decline applications if existing advances are detected.
Split funding is a repayment method where a fixed percentage of daily credit card sales is automatically diverted to repay a merchant cash advance. The payment processor splits each batch settlement between the business and the MCA provider. This means payments fluctuate with sales volume, providing some relief during slower periods.
A short-term business loan typically has a repayment period of 3 to 18 months and provides quick access to capital for immediate needs. These loans often have higher rates than long-term financing but feature faster approval and funding times. They are best suited for addressing temporary cash flow gaps or seizing time-sensitive business opportunities.
Term length is the total duration of a funding agreement from disbursement to the final payment due date. Short-term products may have terms of 3-18 months, while equipment financing can extend to 60 months. Longer terms mean smaller individual payments but may result in a higher total cost of capital.
The total cost of capital is the complete amount paid over the life of a funding agreement, including principal, interest, fees, and any other charges. This metric gives business owners the clearest picture of what funding truly costs. Always compare total cost of capital rather than just interest rates or factor rates when evaluating offers.
Time in business refers to how long a company has been operating, typically measured from its incorporation or first revenue date. Most alternative lenders require a minimum of 6 months in business, while traditional banks often require 2+ years. Longer time in business generally qualifies you for better terms and higher funding amounts.
A UCC (Uniform Commercial Code) filing is a public notice that a lender has a security interest in a borrower's business assets. UCC-1 filings are standard practice for most business funding products and are recorded with the state. Once the funding is repaid, the lender should file a UCC-3 termination to release the lien.
Underwriting is the process a lender uses to evaluate a business's risk level and determine whether to approve funding, and at what terms. Underwriters review factors like bank statements, credit scores, time in business, industry type, and revenue consistency. Alternative lenders often have faster, more technology-driven underwriting processes than traditional banks.
An unsecured loan does not require the borrower to pledge specific collateral. Instead, approval is based on the business's creditworthiness, revenue, and financial history. Because the lender takes on more risk, unsecured loans and working capital loans typically have higher interest rates than secured options.
A variable rate is an interest rate that fluctuates over time based on an underlying benchmark, such as the prime rate or LIBOR. Borrowers benefit when rates decrease but face higher costs when rates rise. Fixed-rate products provide more payment predictability, while variable rates may start lower but carry more long-term risk.
Working capital is the difference between a business's current assets and current liabilities, representing the funds available for daily operations. Adequate working capital ensures a business can pay employees, suppliers, and bills on time. Many businesses use working capital loans to bridge gaps during slow periods or fund growth.
A working capital loan provides short-term financing to cover everyday business expenses like payroll, rent, inventory, and utilities. These loans are designed to support operations rather than fund major asset purchases. Approval is typically based on monthly revenue and bank statements, making them accessible to a wide range of businesses.
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