The Complete Business Financing Glossary: 60+ Terms Defined

A

Accounts Receivable (AR): Money owed to your business by customers for completed work or delivered goods. Outstanding invoices are accounts receivable.

Amortization: The process of paying off a loan through scheduled principal and interest payments over time.

APR (Annual Percentage Rate): The total annual cost of a loan including interest and fees, expressed as a percentage. The standardized measure for comparing financing costs.

B

Balance Sheet: Financial statement showing a business's assets, liabilities, and equity at a specific point in time.

Bridge Loan: Short-term financing designed to bridge a gap until permanent or longer-term financing is in place.

C

Cash Flow: The movement of money into and out of a business. Positive cash flow means more money is coming in than going out.

Collateral: An asset pledged to secure a loan. If the borrower defaults, the lender may seize and sell the collateral to recover the loan balance.

Covenant: A condition in a loan agreement requiring the borrower to maintain certain financial metrics or take/refrain from certain actions.

D

Default: Failure to fulfill loan obligations — typically missing payments — triggering the lender's right to remedies specified in the loan agreement.

DSCR (Debt Service Coverage Ratio): Net Operating Income divided by Total Debt Service. A DSCR of 1.25 means the business earns 25% more than its total debt costs.

DUNS Number: A 9-digit identifier from Dun & Bradstreet used to build and track business credit. Free to obtain at dnb.com.

E-F

EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization. A common measure of business cash generation capacity.

Factor Rate: A pricing method used in MCAs. Total repayment = advance amount × factor rate. A 1.30 factor rate on $50,000 means $65,000 total repayment.

G-L

Holdback Rate: In merchant cash advances, the percentage of daily card receipts remitted to the MCA provider as repayment.

Invoice Factoring: Sale of outstanding invoices to a third party at a discount in exchange for immediate cash.

Lien: A legal claim on an asset. A UCC-1 lien gives a lender rights to business assets in default situations.

P-R

PAYDEX: Dun & Bradstreet's business payment score (0-100). Scores of 80+ indicate on-time or early payment.

Personal Guarantee: A promise by a business owner to repay a business loan from personal assets if the business cannot.

Prime Rate: The benchmark interest rate used by many banks, typically 3% above the Federal Funds Rate.

S-W

SBA (Small Business Administration): U.S. federal agency that guarantees business loans through approved lenders and provides small business support services.

Term Loan: A loan providing a lump sum repaid over a fixed period with scheduled payments.

UCC-1 Filing: Uniform Commercial Code filing establishing a lender's security interest in business assets.

Working Capital: Current assets minus current liabilities. The measure of a business's short-term financial health and operational liquidity.

Now that you know the terminology, Approvd can help you apply it. Use our loan calculator to model options and explore financing with no impact to your credit score.

Frequently Asked Questions

What is working capital and how is it calculated?

Working capital is the difference between your current assets (cash, receivables, inventory) and current liabilities (accounts payable, short-term debt due within 12 months). Formula: Working Capital = Current Assets − Current Liabilities. Positive working capital means you can cover short-term obligations; negative working capital means you can't — a serious warning sign. Healthy working capital ratio (current assets / current liabilities) is 1.5–2.0 for most businesses.

What is the difference between debt financing and equity financing?

Debt financing means borrowing money you must repay with interest — loans, lines of credit, bonds. You keep full ownership. Equity financing means selling ownership stakes in your business in exchange for capital — angel investors, venture capital, crowdfunding. No repayment required, but you give up a percentage of future profits and control. Most small businesses use debt financing; equity is primarily used by high-growth startups that need large amounts of capital and can offer investors significant upside potential.

What does "amortization" mean on a business loan?

Amortization is the process of spreading loan payments over time so each payment covers both interest and principal. Early in a loan, most of the payment goes to interest; later, most goes to principal — this is why paying off a loan early saves significant interest. An amortization schedule shows exactly how much of each payment is interest vs. principal throughout the loan term. Request one from any lender before accepting terms so you understand the true cost of the loan.

What is a balloon payment?

A balloon payment is a large lump-sum payment due at the end of a loan term, after a series of smaller regular payments. For example, a 10-year commercial real estate loan might have monthly payments based on a 25-year amortization, with a balloon payment of the remaining balance due at year 10. Balloon payments can catch business owners off guard — make sure you have a plan to refinance or pay the balloon before taking a loan with this structure.

What is the prime rate and how does it affect business loan rates?

The prime rate is the interest rate that U.S. banks use as a baseline for many loans — it's typically 3 percentage points above the federal funds rate set by the Federal Reserve. Many variable-rate business loans are priced as "Prime + X%" — so when the Fed raises rates, your loan rate rises automatically. SBA 7(a) loans are variable rate: Prime + 2.75% to 4.75% depending on loan size. Understanding this linkage helps you anticipate rate changes on variable-rate financing.