Knowledge Base
Financing
Glossary
Clear definitions of the terms you will encounter in commercial lending. No jargon, no confusion — just what you need to know.
Amortization
The process of paying off a loan through regular, scheduled payments over a set period. Each payment covers both principal and interest, with the proportion shifting over time — more interest early, more principal later.
Example
A $500K SBA loan with a 25-year amortization means your monthly payment is calculated to pay off the full balance over 300 months.
Balloon Payment
A large lump-sum payment due at the end of a loan term. Common in commercial real estate loans where the loan amortizes over 25–30 years but the term is only 5–10 years, leaving a remaining balance that must be refinanced or paid off.
Example
A CRE loan with a 10-year term and 25-year amortization will have a balloon payment equal to roughly 70% of the original principal at year 10.
Collateral
An asset pledged to secure a loan. If the borrower defaults, the lender can seize and sell the collateral to recover losses. Common collateral includes real estate, equipment, inventory, and accounts receivable.
Example
For an equipment loan, the financed machinery itself serves as collateral. For an SBA loan, the business owner may also pledge personal real estate.
DSCR (Debt Service Coverage Ratio)
A key metric lenders use to assess whether a business can afford its debt payments. Calculated as Net Operating Income divided by Total Debt Service. Most lenders require a DSCR of 1.25x or higher.
Example
If your business generates $200K in net operating income and your annual debt payments are $150K, your DSCR is 1.33x — well above the 1.25x threshold.
Default
Failure to meet the legal obligations of a loan agreement, typically by missing payments. Default can trigger penalties, accelerated repayment demands, and loss of collateral.
Example
Missing three consecutive monthly payments on a working capital loan may trigger a default, allowing the lender to demand the full remaining balance immediately.
Equity
The value of ownership in a business or property. In real estate, equity is the property value minus any outstanding mortgage balance. In business, equity represents the owners stake after subtracting liabilities from assets.
Example
If your commercial property is worth $2M and you owe $1.2M, you have $800K in equity. This equity can be leveraged for additional financing.
Factoring
A financing method where a business sells its accounts receivable (invoices) to a third party (factor) at a discount in exchange for immediate cash. The factor then collects payment from the customers.
Example
A manufacturer with $100K in outstanding invoices sells them to a factor for $95K, getting cash immediately instead of waiting 60 days for customers to pay.
Interest Rate
The cost of borrowing money, expressed as a percentage of the principal amount per year. Can be fixed (stays the same) or variable (changes with a benchmark like Prime).
Example
A $500K loan at 7.5% fixed means you pay $37,500 in interest per year if no principal is repaid. With amortization, the actual interest paid decreases over time.
Lien
A legal claim against an asset used as collateral. A lien gives the lender the right to seize the asset if the borrower defaults. Common types include UCC liens (on business assets) and mortgage liens (on real estate).
Example
When you take out an SBA loan, the lender files a UCC-1 lien on your business assets, publicly recording their security interest.
LTV (Loan-to-Value Ratio)
The ratio of a loan amount to the appraised value of the collateral. Lenders use LTV to assess risk — lower LTV means more equity cushion and less risk. Most CRE lenders cap LTV at 75–80%.
Example
For a $1M property, a $750K loan has an LTV of 75%. The borrower has $250K (25%) in equity.
Net Operating Income (NOI)
A propertys total income minus operating expenses (but before debt service and taxes). NOI is the primary metric for evaluating commercial real estate profitability and is used to calculate DSCR.
Example
A retail plaza generates $500K in annual rent and has $150K in operating expenses. NOI = $350K. With $200K in annual debt service, DSCR = 1.75x.
Origination Fee
A fee charged by a lender to process and underwrite a new loan. Typically expressed as a percentage of the loan amount (0.5%–3%). This fee covers the cost of evaluating the borrowers creditworthiness and structuring the deal.
Example
On a $1M loan with a 1% origination fee, the borrower pays $10K at closing. Some lenders roll this into the loan balance rather than requiring it upfront.
Prepayment Penalty
A fee charged when a borrower pays off a loan before the scheduled maturity date. Lenders use prepayment penalties to protect the interest income they expected to earn over the full term.
Example
SBA 7(a) loans with terms of 15+ years have a prepayment penalty only in the first 3 years. CRE loans may use yield maintenance or defeasance structures.
Principal
The original amount of money borrowed, excluding interest. As you make payments, a portion goes toward reducing the principal and a portion covers interest.
Example
On a $500K loan, your principal is $500K. After 5 years of payments, your remaining principal might be $420K depending on the amortization schedule.
Prime Rate
The interest rate that commercial banks charge their most creditworthy customers. Many variable-rate loans are indexed to Prime (e.g., Prime + 2.75%). The Prime Rate moves with the Federal Funds Rate set by the Federal Reserve.
Example
If Prime is 8.5% and your SBA 7(a) loan is Prime + 2.75%, your current rate is 11.25%. If the Fed raises rates, your loan payment increases.
Refinancing
Replacing an existing loan with a new one, typically to secure better terms, lower rates, or pull equity from an appreciated asset. Refinancing can also extend the term or switch from variable to fixed rates.
Example
A business owner refinances a 7% CRE loan into a 5.5% loan after 3 years of property appreciation, saving $2,500/month and pulling $200K in equity for expansion.
SBA 504 Loan
An SBA program for financing fixed assets like real estate and heavy equipment. Structured as 50% conventional lender, 40% Certified Development Company (CDC), and 10% borrower down payment. The CDC portion has a fixed rate.
Example
A $2M equipment and building purchase: $1M from a bank, $800K from a CDC at a fixed rate, and $200K (10%) from the borrower.
SBA 7(a) Loan
The SBAs most popular loan program, providing up to $5M for working capital, equipment, real estate, and business acquisition. The SBA guarantees a portion (typically 75–85%), reducing lender risk and enabling better terms.
Example
A restaurant owner uses a $1.2M SBA 7(a) loan to open a second location. The SBA guarantees 75% ($900K), so the lender faces only $300K in risk.
Term (Loan Term)
The length of time over which a loan agreement is in effect. The term determines when the loan must be fully repaid or refinanced. It is different from amortization — a loan may amortize over 25 years but have a 10-year term.
Example
A construction loan has a 24-month term (must be repaid or converted by month 24) but interest-only payments during that period.
Underwriting
The process lenders use to evaluate the risk of a loan and decide whether to approve it. Underwriting involves reviewing financials, credit, collateral, business plan, market conditions, and borrower experience.
Example
During underwriting for a $3M CRE loan, the lender orders an appraisal, reviews 3 years of tax returns, verifies rent rolls, and checks the borrowers personal financial statement.
Working Capital
The cash available to fund day-to-day business operations. Calculated as Current Assets minus Current Liabilities. Working capital loans provide short-term liquidity for payroll, inventory, and operational expenses.
Example
A seasonal retailer needs $150K in working capital to stock inventory before the holiday season. They draw from a line of credit, sell through inventory, and repay the line.
Yield Maintenance
A type of prepayment penalty that compensates the lender for the interest income they would have earned had the loan not been paid off early. It is calculated based on the difference between the loan rate and current market rates.
Example
A borrower pays off a 6% CRE loan when market rates are 4%. Yield maintenance requires the borrower to pay the present value of the 2% spread over the remaining term.
Still have questions?
Our advisors are happy to explain any term in the context of your specific situation. No generic answers — just real guidance.