Small Business Funding Glossary: 41 Terms Every Borrower Should Know (2026)
Plain-English definitions for the 41 most important small business finance terms — factor rates, DSCR, holdback, UCC liens, and more. Each entry links to the full guide chapter where it applies.
A
Accounts Receivable (AR)
Money your customers owe your business for goods or services already delivered but not yet paid for. AR is a current asset on your balance sheet and the basis for invoice factoring and AR financing.
See Ch. 5: Invoice FactoringAdvance Rate
In invoice factoring, the percentage of an invoice's face value the factor pays you upfront — typically 70–90%. The remaining 10–30% (minus fees) is paid when your customer settles the invoice.
See Ch. 5: Invoice FactoringAmortization
The process of paying down a loan through regular scheduled payments that cover both principal and interest. Early payments are mostly interest; later payments are mostly principal. A fully amortizing loan has a $0 balance at maturity.
See Ch. 1: Business Financing 101Annual Percentage Rate (APR)
The total yearly cost of borrowing expressed as a percentage — it includes the interest rate plus most fees (origination, annual fees, etc.) spread over the loan term. APR lets you compare products with different fee structures on equal footing. MCA factor rates must be converted to APR for an honest cost comparison; a 1.35 factor rate on a 6-month advance can exceed 70–120% APR.
See Ch. 2: Merchant Cash AdvancesB
Blanket UCC Lien
A Uniform Commercial Code filing that gives a lender a security interest in all of a business's current and future assets — equipment, inventory, receivables, cash, and IP. The 'blanket' label means it covers everything rather than specific items. Common in MCAs and SBA loans; it blocks you from pledging those assets to another lender without permission.
See Ch. 2: Merchant Cash AdvancesBusiness Credit Score
A numeric rating of how reliably your business pays its obligations, separate from your personal FICO score. The three main scores: Dun & Bradstreet PAYDEX (0–100, 80+ = pays within terms), Experian Intelliscore (1–100), and Equifax Business Credit Risk (101–992). SBA and bank lenders check all three; online lenders typically focus on personal FICO instead.
See Ch. 9: Improve Approval OddsC
Cash Flow
Net cash coming into your business minus net cash going out over a period. Lenders care about cash flow, not profit — a profitable business can still default if cash doesn't arrive before bills are due. Most lenders require 3+ months of bank statements to verify real cash flow.
See Ch. 1: Business Financing 101Collateral
An asset pledged to secure a loan. If you default, the lender can seize and sell the collateral to recover its loss. Common types: real estate, equipment, inventory, accounts receivable, vehicles. SBA loans require collateral when it's available; loans under $50,000 are generally exempt from the collateral requirement.
See Ch. 3: SBA LoansConfession of Judgment (COJ)
A clause in an MCA or loan agreement that waives your right to defend yourself in court and allows the lender to obtain an immediate judgment against you without a lawsuit or advance notice. New York banned COJs against out-of-state borrowers in 2019 following documented abuse. Still enforceable in many other states. It is a major red flag in any funding contract.
See Ch. 2: Merchant Cash AdvancesCredit Utilization
The ratio of your outstanding revolving-credit balances to your total credit limits, expressed as a percentage. Keeping utilization below 30% on both personal and business credit cards meaningfully improves credit scores. Lenders also check utilization to gauge how much of your credit capacity is already consumed.
See Ch. 9: Improve Approval OddsD
Debt Service Coverage Ratio (DSCR)
Net operating income divided by total annual debt service (all principal + interest payments due in the year). A DSCR of 1.0x means income exactly covers debt; 1.25x means you earn 25% more than your debt payments. SBA lenders require a minimum 1.10x for loans ≤$350,000 and 1.25x for larger amounts. Below 1.0x means you can't cover your payments from operations alone.
See Ch. 3: SBA LoansDefault
Failure to meet the repayment terms of a loan — typically missing one or more payments past the grace period. Default can trigger acceleration (the full balance becomes immediately due), lender seizure of collateral, personal guarantee claims, and significant credit damage. MCA agreements often have broader default triggers, such as closing a bank account or opening a new one without notice.
See Ch. 2: Merchant Cash AdvancesDraw Period
The phase of a business line of credit during which you can borrow against your limit. You pay interest only on what you've drawn. After the draw period ends (typically 1–5 years), the line converts to a repayment period during which you pay down the outstanding balance with no new draws permitted.
See Ch. 4: Lines of CreditE
Equipment Financing
A loan or lease where the purchased equipment serves as its own collateral, eliminating the need for separate collateral pledges. Rates typically range 6–18% APR depending on equipment type, business age, and credit. The loan term usually matches the equipment's useful life (3–7 years for most; up to 10 for heavy machinery). Ownership transfers at loan payoff — unlike a lease.
See Ch. 6: Equipment FinancingF
Factor Rate
A cost multiplier used in merchant cash advances, expressed as a decimal (commonly 1.10–1.50). Multiply your advance amount by the factor rate to get your total repayment obligation. Example: $50,000 × 1.35 = $67,500 total owed. Factor rates are NOT interest rates — they don't account for time. A 1.35 factor rate on a 4-month advance converts to roughly 85–105% APR. Always convert to APR before comparing to other products.
See Ch. 2: Merchant Cash AdvancesG
Gross Receipts
Total revenue your business receives before any deductions for returns, expenses, or taxes. MCA providers typically base advance amounts on 3–6 months of gross receipts, then size the advance at 75–125% of average monthly gross receipts depending on credit and industry risk.
See Ch. 2: Merchant Cash AdvancesH
Holdback Rate
In a merchant cash advance, the fixed percentage of your daily or weekly sales receipts that the provider withholds to repay the advance. Holdback rates typically range 10–20%. A 15% holdback on a business processing $3,000/day in card sales means $450/day is applied to the advance. Because it's percentage-based, repayment slows automatically when sales slow — but the total owed never changes.
See Ch. 2: Merchant Cash AdvancesI
Invoice Factoring
Selling outstanding invoices to a third party (the 'factor') at a discount in exchange for immediate cash. The factor pays you 70–90% upfront and collects payment directly from your customers. When your customer pays, you receive the remaining balance minus the factor's fee (typically 1–5% of the invoice value). Your customers will know they're paying the factor, not you.
See Ch. 5: Invoice FactoringInvoice Financing (AR Financing)
Using unpaid invoices as collateral for a line of credit or short-term loan. Unlike factoring, you retain control of your collections — your customers pay you directly and you repay the lender. Invoice financing is confidential; your customers never know you borrowed against their invoices.
See Ch. 5: Invoice FactoringL
Line of Credit (LOC)
A revolving credit facility with a set borrowing limit. You draw funds as needed up to that limit, repay them (paying interest only on what's outstanding), and borrow again. Business LOCs typically range from $10,000–$250,000; bank and SBA lines can go higher. Unlike a term loan, you're not charged interest on the unused portion.
See Ch. 4: Lines of CreditLoan-to-Value Ratio (LTV)
The loan amount divided by the appraised value of the collateral, expressed as a percentage. A $400,000 loan on a property appraised at $500,000 = 80% LTV. Lower LTV means less risk for the lender and often better rates. SBA lenders typically lend up to 90% LTV on real estate used as collateral.
See Ch. 3: SBA LoansM
Merchant Cash Advance (MCA)
A lump-sum cash advance where a provider purchases a percentage of your future business receivables at a discount. You repay via a fixed daily or weekly holdback from sales. MCAs are not loans — they carry no interest rate and no fixed repayment term. They're the fastest form of business funding (same-day possible) but consistently the most expensive, with effective APRs often exceeding 80–150%.
See Ch. 2: Merchant Cash AdvancesMicroloan
A small business loan of $50,000 or less, often used by startups and microbusinesses with limited credit history. SBA microloans are issued through nonprofit community lenders (not banks); the average SBA microloan is approximately $15,000. Rates typically range 8–13%; terms up to 6 years. Ideal for businesses that can't qualify for traditional bank financing.
See Ch. 8: Startup FundingN
Net 30 Terms
A trade credit arrangement where a vendor or supplier extends 30 days to pay an invoice in full. Net-30 accounts that report to business credit bureaus (like Uline, Quill, or Grainger) are one of the fastest ways to build a PAYDEX score — especially for businesses with no credit history. Paying early ('2/10 net 30' means a 2% discount if paid within 10 days) accelerates score-building.
See Ch. 9: Improve Approval OddsO
Origination Fee
A one-time fee charged by a lender to process, underwrite, and fund a loan. Typically 0.5–3% of the loan amount for SBA and bank loans; some online lenders charge 3–5%. The fee is usually deducted from proceeds (you receive less than you applied for) or added to the loan balance. Always factor origination fees into your APR calculation.
See Ch. 3: SBA LoansP
PAYDEX Score
Dun & Bradstreet's business payment index, scored 0–100. It measures how promptly your business pays its trade obligations relative to agreed terms: 80 = pays exactly on time, 100 = pays 30+ days early. Unlike personal FICO, PAYDEX is based entirely on trade payment history, not credit inquiries or utilization. You need a D-U-N-S number and active tradelines to generate a score.
See Ch. 9: Improve Approval OddsPersonal Guarantee
A legal commitment by a business owner to repay a debt personally if the business cannot. It makes your personal assets — home, savings accounts, personal vehicle — liable for the business obligation. SBA loans require a personal guarantee from any owner with 20%+ equity stake. Some online lenders require a 'limited' personal guarantee (capped at a dollar amount) rather than an unlimited one.
See Ch. 3: SBA LoansPrepayment Penalty
A fee charged for paying off a loan before its scheduled maturity. SBA 7(a) loans with terms over 15 years carry a prepayment fee of 5% (year 1), 3% (year 2), 1% (year 3). Most online lenders have no prepayment penalty. MCA agreements almost never reduce the total owed for early repayment — the full factor amount is due regardless of payoff timing.
See Ch. 2: Merchant Cash AdvancesPrime Rate
The benchmark interest rate major banks use as a reference for variable-rate products. Published by The Wall Street Journal, it equals the upper limit of the federal funds target range plus 3 percentage points. As of June 2026, the WSJ Prime Rate is 6.75% (federal funds target 3.50–3.75%, per the Fed's H.15 release). SBA 7(a) variable rates are priced as Prime + a spread of 3–6.5% depending on loan size (Prime + 6.5% on loans ≤$50K, down to Prime + 3% above $250K) — roughly 9.75–13.25% at current Prime.
See Ch. 3: SBA LoansR
Recourse vs. Non-Recourse Factoring
In recourse factoring, if your customer fails to pay the invoice, you must buy it back from the factor — you bear the credit risk. In non-recourse factoring, the factor absorbs the loss if your customer becomes insolvent. Non-recourse is more expensive because the factor takes on more risk; it typically only covers insolvency, not disputes or payment delays.
See Ch. 5: Invoice FactoringRevenue-Based Financing (RBF)
A funding structure where repayment is a fixed percentage of total monthly revenue — not just card receipts — until a predetermined total is repaid. RBF repayment rises and falls with revenue, giving more flexibility than fixed-term loans. Unlike an MCA, RBF is often disclosed as a loan with a stated APR and has no holdback on card transactions specifically.
See Ch. 7: Alternative Online LendingRevolving Credit
Credit that can be used, repaid, and used again up to the credit limit without reapplying. Business lines of credit and credit cards are revolving; term loans and SBA loans are not. Revolving credit is ideal for ongoing working capital needs or irregular cash flow gaps because you only pay for what you use.
See Ch. 4: Lines of CreditS
SBA 7(a) Loan
The SBA's primary loan guarantee program. Maximum loan amount: $5 million. Terms: up to 10 years for working capital/equipment, up to 25 years for real estate. Rates: variable at Prime + 3–6.5% (depending on loan size); fixed-rate options available. The SBA guarantees 75–85% of the loan amount, reducing lender risk. Requires 650+ FICO, 2+ years in business, and DSCR ≥1.25x for most applications.
See Ch. 3: SBA LoansSBA 504 Loan
An SBA program specifically for purchasing fixed assets: commercial real estate and major equipment. Structure: 50% bank loan + 40% SBA-backed debenture + 10% borrower equity. The all-in effective rate on the SBA-backed portion was roughly 6.0% as of May 2026 (about 5.95% on a 25-year term, 6.01% on a 20-year term) — among the lowest long-term fixed rates available for commercial real estate acquisition. Maximum SBA portion: $5 million ($5.5M for manufacturers and energy projects).
See Ch. 3: SBA LoansSBA Express Loan
A sub-$500,000 SBA loan with a 36-hour SBA response guarantee (not funding time). Faster processing than standard 7(a) but with a lower guarantee: 50% vs. 75% for standard loans. This shifts more risk to lenders, resulting in stricter underwriting and higher rates. Best for established businesses with strong credit that need capital quickly and can't wait for a full 7(a) process.
See Ch. 3: SBA LoansStacking
Taking multiple cash advances or short-term loans simultaneously from different providers without disclosing existing obligations. Stacking is prohibited in most MCA agreements, and lenders can see existing UCC liens that signal prior advances. The result is multiple simultaneous holdbacks that together can exceed 40–60% of daily revenue, making it nearly impossible to cover operating expenses — the primary cause of MCA-related business defaults.
See Ch. 2: Merchant Cash AdvancesSubordination
An agreement where a junior lender agrees that their security interest or claim on assets ranks behind (is 'subordinate to') a senior lender's claim in the event of default or liquidation. SBA requires all existing lenders to subordinate their liens before approving an SBA loan. Without subordination, the SBA won't lend.
See Ch. 3: SBA LoansT
Term Loan
A loan disbursed as a lump sum and repaid over a defined period (the 'term') with regular fixed or variable payments. Business term loans range from 1 year (short-term online lenders) to 10+ years (bank/SBA). Unlike a line of credit, once repaid a term loan is closed — you must reapply to borrow again.
See Ch. 1: Business Financing 101Time in Business
How long your business has been operating as a legal entity with revenue. This is one of the top three underwriting variables at virtually every lender. Minimum requirements: MCAs and online short-term loans: 3–6 months. SBA loans (most programs): 2 years. Traditional banks: 2–3 years. Startups under 12 months are largely limited to SBA microloans, SBIR grants, and personal/business credit cards.
See Ch. 1: Business Financing 101U
UCC Filing (Uniform Commercial Code)
A public notice, filed with the secretary of state, that a lender holds a security interest in specific business assets. A UCC-1 (blanket) filing covers all assets; a UCC-1 with a schedule covers specific collateral. Future lenders check for existing UCC filings before lending — a blanket UCC lien from an MCA provider can make it nearly impossible to get a bank loan or SBA financing without the MCA lender's subordination agreement.
See Ch. 2: Merchant Cash AdvancesW
Working Capital
Current assets minus current liabilities. It measures the short-term liquidity available to run day-to-day operations — paying suppliers, employees, and rent before receivables come in. Negative working capital signals a business that cannot cover near-term obligations from current resources. Most working-capital loans (MCAs, LOCs, short-term loans) are priced higher because they address this acute, high-risk need.
See Ch. 4: Lines of CreditFrequently Asked Questions
What is a factor rate and how is it different from an interest rate?
A factor rate is a flat cost multiplier used in merchant cash advances (e.g., 1.35 means you repay $1.35 per $1 advanced). Unlike an interest rate, it doesn't account for time — the same total is owed whether you repay in 3 months or 9 months. To compare fairly to other loans, convert factor rates to APR: a 1.35 factor rate on a 6-month advance is roughly 70–105% APR depending on repayment speed.
What DSCR do I need to qualify for an SBA loan?
SBA lenders generally require a minimum debt service coverage ratio of 1.10x for loans up to $350,000 and 1.25x for larger amounts, meaning your net operating income must exceed your total debt service by at least 10–25%. Some preferred lenders apply a 1.25x minimum across all loan sizes. DSCR below 1.0x typically results in denial unless the business has a strong collateral position.
What is a blanket UCC lien and why does it matter?
A blanket UCC lien is a public filing that gives a lender a claim on all your business assets — equipment, inventory, receivables, cash. When an MCA provider files a blanket UCC-1, it shows up in state records and signals to future lenders that your assets are already pledged. Banks and the SBA will not lend over an existing blanket lien without a subordination agreement from the prior lender, which MCA providers rarely grant.
What is the difference between invoice factoring and invoice financing?
In invoice factoring, you sell your invoices to a third party that then collects directly from your customers — your customers know you used a factor. In invoice financing (AR financing), you borrow against your invoices as collateral but collect from your customers yourself and repay the lender. Invoice financing is confidential and preserves customer relationships, but typically has stricter requirements than factoring.
What is holdback rate in a merchant cash advance?
The holdback rate is the fixed daily or weekly percentage of your sales receipts that the MCA provider automatically withholds to repay the advance. Typically 10–20% of card sales or total bank deposits. Because it's percentage-based, your daily repayment amount fluctuates with revenue — slower on slow days, faster on good days — but the total owed (advance × factor rate) never changes.
Do I need to personally guarantee a business loan?
For most loans over $25,000 — especially SBA loans, bank loans, and MCA agreements — yes. SBA loans require a personal guarantee from every owner with 20% or more equity. Online lenders typically require it regardless of ownership percentage. Equipment financing and invoice factoring sometimes don't require personal guarantees because the collateral (equipment or invoices) already secures the debt. Always read the guarantee clause before signing.
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