Updated October 5, 2026

Loan Glossary

Use the filter below to find a term quickly. Definitions are written for borrowers and small-business owners, not underwriters.

• Amortization

  The process of paying off debt through scheduled principal and interest payments over a fixed term. An amortization schedule shows how each payment is split and how the outstanding balance declines over time.

• APR (Annual Percentage Rate)

  The total cost of borrowing expressed as a yearly rate, including the interest rate plus certain lender fees. APR lets you compare two loan offers on a level playing field, though the exact fees included vary by lender and loan type.

• Balloon Payment

  A large lump-sum payment due at the end of a loan term. Balloon loans typically have lower monthly payments during the term, but require the borrower to refinance or pay the remaining balance in full when the balloon comes due.

• Base Rate

  The benchmark interest rate used as a starting point for setting loan pricing. In SBA and commercial loans, the rate is often expressed as prime rate plus a lender spread. The base rate itself is typically tied to the Federal Reserve's policy rate or a published index.

• Bridge Loan

  A short-term loan designed to cover a gap between the timing of two transactions, such as buying a new property before selling an existing one. Bridge loans usually carry higher rates and require strong collateral.

• Cap Rate (Capitalization Rate)

  A metric used in commercial real estate to estimate the potential return on an income-producing property. It is calculated as net operating income divided by the property's current market value or purchase price.

• CDC (Certified Development Company)

  A state-chartered nonprofit organization that partners with the SBA to deliver 504 loans. The CDC provides a portion of the financing, typically up to 40%, while a conventional lender covers 50% and the borrower contributes at least 10%.

• Closing Costs

  Fees and expenses paid at the closing of a loan, beyond the down payment. They can include origination fees, appraisal fees, title insurance, recording fees, attorney fees, and prepaid interest or property taxes.

• Collateral

  An asset pledged to secure a loan. If the borrower defaults, the lender can seize the collateral. Common collateral includes real estate, equipment, inventory, and accounts receivable.

• Covenant

  A clause in a loan agreement that restricts or requires certain borrower actions. Affirmative covenants require you to maintain insurance or submit financial statements; negative covenants restrict additional debt or asset sales without lender consent.

• Debenture

  A type of bond or debt instrument. In SBA 504 financing, the CDC issues a debenture that carries a 100% SBA guarantee and is sold to investors. The CDC holds a second lien on the project, behind the bank.

• Draw Period

  The time during which a borrower can access funds from a line of credit. During the draw period, the borrower may be required to pay interest only or a minimum percentage of the outstanding balance.

• DSCR (Debt Service Coverage Ratio)

  A ratio that measures a business's ability to cover its debt payments. It is calculated as annual net operating income divided by annual debt service. A DSCR of 1.25x means the business generates 25% more income than the loan requires, a common underwriting guideline.

• Equity Injection

  The borrower's own capital contributed to a deal, typically required as a down payment. In SBA 504 loans, the equity injection is at least 10%; in 7(a) loans, it varies by use of proceeds and lender overlays.

• Escrow

  An account held by the lender or a third party into which monthly deposits for property taxes and homeowners insurance are collected. The lender then pays those bills when they come due, ensuring the property remains insured and taxes stay current.

• Factor Rate

  A pricing method used primarily in merchant cash advances and some short-term business loans, expressed as a decimal multiplier of the borrowed amount. A factor rate of 1.3 on a $10,000 advance means the borrower repays $13,000 total, regardless of term.

• FICO

  A widely used credit scoring model developed by the Fair Isaac Corporation. FICO scores range from 300 to 850 and are a major factor in mortgage and business loan underwriting. Higher scores generally mean better rates and easier approval.

• Fixed Rate

  A loan with an interest rate that does not change over the life of the loan. Monthly principal and interest payments remain the same, making budgeting predictable. Fixed-rate structures are common in 15- and 30-year mortgages and some SBA 504 loans.

• Grace Period

  A period after a payment due date during which the borrower can make the payment without penalty or without the loan being reported as delinquent. Grace periods are more common in consumer and mortgage lending than in small business term loans.

• Guaranty (Personal Guarantee)

  A promise by an individual — typically a business owner — to repay a loan if the business cannot. SBA loans require a personal guarantee from any owner with 20% or more ownership. Conventional lenders may require unlimited or cross-collateralized guarantees.

• Hard Money

  A short-term loan secured by real estate, typically funded by private investors or specialized funds rather than banks. Hard money loans carry higher rates and fees but close quickly, making them useful for fix-and-flip deals or borrowers who cannot wait for conventional underwriting.

• Interest-Only (IO)

  A payment structure in which the borrower pays only the interest accrued each period, not any principal. The balance remains unchanged until the interest-only period ends, at which point the loan may convert to fully amortizing payments or refinance.

• Lien

  A legal claim against an asset used as collateral for a debt. If the borrower defaults, the lienholder has the right to seize and sell the asset to satisfy the obligation. Liens are recorded publicly, typically at the county or state level.

• Line of Credit (LOC)

  A flexible, revolving loan that lets a borrower draw funds up to an approved limit, repay them, and draw again. Interest is charged only on the outstanding balance. Lines of credit are commonly used for working capital, seasonal inventory, and gap financing.

• LOI (Letter of Intent)

  A non-binding document outlining the proposed terms of a loan or business transaction before a formal agreement is signed. In commercial lending, an LOI may state the proposed amount, rate, term, and conditions, but it is not a commitment to lend.

• LTV (Loan-to-Value)

  The ratio of the loan amount to the appraised value of the collateral. A $700,000 loan on a $1,000,000 property produces a 70% LTV. Lower LTVs represent less risk to the lender and often result in better rates.

• Maturity

  The date on which a loan must be paid in full. The term is the length of the loan; maturity is the actual end date. A 10-year loan originated on January 1, 2025 matures on January 1, 2035.

• Mezzanine

  A hybrid of debt and equity financing that sits between senior debt and owner equity in the capital stack. Mezzanine lenders often receive warrants or an equity kicker in addition to interest. It is typically used in commercial real estate acquisitions and leveraged buyouts.

• Microloan

  A small, short-term loan, often defined by the SBA as up to $50,000, delivered through nonprofit intermediary lenders. Microloans are intended for working capital, inventory, supplies, or equipment and often come with technical assistance.

• NMLS Consumer Access

  A free, searchable database maintained by the Nationwide Multistate Licensing System that lets consumers verify whether a mortgage or consumer finance professional is licensed, registered, or has disclosed disciplinary history.

• Non-Recourse

  A loan in which the lender's only remedy in the event of default is to seize the collateral. The lender cannot pursue the borrower's personal assets beyond the collateral. Non-recourse financing is common in large commercial real estate transactions.

• Origination Fee

  A fee charged by a lender for processing a loan application, typically expressed as a percentage of the loan amount. Origination fees are common in mortgages, SBA loans, and conventional commercial loans and may be deducted from the loan proceeds at closing.

• PITI

  An acronym for the four components of a monthly mortgage payment: principal, interest, taxes, and insurance. Lenders often collect taxes and insurance into an escrow account, so the total monthly payment includes all four elements.

• Points

  Prepaid interest paid at closing to lower the loan's ongoing interest rate. One point equals 1% of the loan amount. Paying points can make sense if you plan to keep the loan long enough for the monthly savings to exceed the upfront cost.

• Prepayment Penalty

  A fee charged if the borrower pays off all or part of the loan before the scheduled maturity. Prepayment penalties protect the lender's expected interest income but can make refinancing expensive. They are prohibited or limited on some types of loans but common in conventional commercial deals.

• Prime Rate

  A benchmark interest rate published by major banks, historically set at roughly the federal funds rate plus a spread. Many SBA 7(a) loans and business lines of credit are priced as prime plus a lender spread.

• Principal

  The amount of money borrowed, not including interest or fees. As payments are made, the principal balance declines. In the early years of an amortizing loan, a large portion of each payment goes toward interest rather than principal.

• Refinancing

  The process of replacing an existing loan with a new loan, usually to secure a lower rate, change the term, or extract equity. Rate-and-term refinances keep the loan amount the same; cash-out refinances increase the balance to access equity.

• SBA 504

  The SBA's program for major fixed assets — commercial real estate or heavy equipment. Financing is split between a conventional lender (50%), a CDC backed by the SBA (up to 40%), and the borrower (at least 10%). 504 loans typically carry long fixed-rate terms.

• SBA 7(a)

  The SBA's flagship loan program, designed for general business purposes including working capital, equipment, real estate, and acquisition. Maximum loan size is $5 million. Rates are variable, capped by SBA rules, and terms stretch to 25 years for real estate.

• Secured Loan

  A loan backed by collateral that the lender can seize if the borrower defaults. Mortgages, SBA loans, and most commercial term loans are secured. Secured loans usually carry lower rates than unsecured loans because the collateral reduces lender risk.

• Size Standards

  Industry-specific revenue or employee thresholds published by the SBA that determine whether a business qualifies as "small" for SBA loan programs. Size standards vary by NAICS code and are periodically updated.

• Term Loan

  A loan with a fixed repayment schedule and a set maturity date. Term loans are used for equipment, real estate, or expansion capital and can be secured or unsecured. They differ from revolving lines of credit, which allow repeated borrowing and repayment.

• UCC Filing

  A public notice filed under the Uniform Commercial Code that establishes a lender's lien on a borrower's business assets. UCC-1 financing statements are filed when the loan closes and terminated when the loan is paid off. They are part of the public record.

• Underwriting

  The lender's evaluation of a borrower's creditworthiness, cash flow, collateral, and character to decide whether to approve a loan and at what terms. Underwriting can take days to weeks depending on the lender and loan type.

• Unsecured Loan

  A loan approved without specific collateral. The lender relies on the borrower's creditworthiness and cash flow alone. Unsecured loans carry higher rates and smaller limits because the lender has no asset to seize if the borrower defaults.

• Variable Rate

  A loan with an interest rate that can change periodically based on a benchmark index plus a fixed spread. Payments rise or fall when the index moves. SBA 7(a) loans and most lines of credit use variable rates.

• WCP (Working Capital Pilot)

  A limited SBA pilot program designed to expand access to smaller working capital loans. The pilot uses streamlined underwriting and may carry different eligibility criteria or maximums than the standard 7(a) program. Check with an SBA lender for current availability.

• Working Capital

  The funds a business uses for day-to-day operations — inventory, payroll, rent, and overhead. Working capital loans are typically short-term and used to smooth cash flow gaps or fund growth.