Business Loan Terms Glossary: Every Term You Need to Know

Understanding business loan terminology helps you compare offers, ask the right questions, and make confident financing decisions. This glossary covers the most important terms you'll encounter when applying for and managing business loans.

Core Loan Terms

Principal

The original amount of money borrowed, before interest. When you make loan payments, a portion goes toward principal repayment and a portion goes toward interest.

Interest Rate vs. APR

The interest rate is the annual cost of borrowing the principal, expressed as a percentage. The APR (Annual Percentage Rate) includes the interest rate plus all fees (origination, servicing, etc.), giving a more complete picture of total borrowing cost. Always compare APRs, not just interest rates.

Term

The length of time you have to repay the loan. Short-term loans: 3--18 months. Medium-term: 2--5 years. Long-term (SBA): up to 10--25 years.

Amortization

The process of paying off a loan through regular payments that cover both interest and principal. Early payments are interest-heavy; later payments pay down more principal.

Loan Types and Products

Term Loan

A lump sum borrowed upfront and repaid over a fixed schedule. See our term loan guide.

Line of Credit

A flexible credit facility you draw from and repay as needed. You only pay interest on what you use. See our line of credit guide.

SBA Loan

A loan partially guaranteed by the U.S. Small Business Administration, offered through approved bank and nonbank lenders at competitive rates. See our SBA loan overview.

Merchant Cash Advance (MCA)

An advance against future credit card sales, repaid as a percentage of daily card receipts. Not technically a loan -- uses factor rates instead of APR.

Equipment Financing

A loan or lease specifically for equipment purchases where the equipment serves as collateral. See our equipment financing guide.

Qualification Metrics

DSCR (Debt Service Coverage Ratio)

Net Operating Income divided by total debt payments. A DSCR of 1.25 means your business generates $1.25 for every $1.00 in debt payments. Most lenders want 1.25 or higher.

Personal Guarantee

A pledge that the business owner is personally liable if the business cannot repay. Most small business loans require one. See our article on personal guarantees.

Collateral

Assets pledged to secure a loan. If you default, the lender can seize the collateral. Can be business assets (equipment, real estate) or personal assets.

Factor Rate

A multiplier used with MCAs instead of APR. A factor rate of 1.3 means you repay $1.30 for every $1.00 borrowed. Factor rates of 1.1--1.5 are typical.

Origination Fee

A one-time fee charged at loan closing, typically 0.5%--5% of the loan amount. Always factor this into your APR comparison.

Risk and Structure Terms

Prepayment Penalty

A fee charged if you pay off a loan before the scheduled end date. Common with some term loans; always ask about this before signing.

UCC Filing

Uniform Commercial Code filing -- a public notice that a lender has a security interest in your business assets. Standard for most business loans; does not affect credit score.

Subordination

When a second lender agrees to have their claim on assets repaid after the first lender. Required by some lenders when you have existing business debt.

Use our business loan calculator to model how these terms affect your monthly payments and total cost. Approvd helps you compare loan offers side-by-side so you can choose the right product for your business.

Frequently Asked Questions

What is the difference between APR and factor rate?

APR (Annual Percentage Rate) is a standardized annual cost of borrowing that includes both interest and fees, expressed as a percentage — used for most traditional loans. A factor rate is a multiplier (e.g., 1.3) used by MCA and some short-term lenders: multiply the advance amount by the factor rate to get total repayment. Factor rates don't account for time, making them difficult to compare to APR. Always convert factor rates to approximate APR before comparing financing options.

What does DSCR mean and what is a good DSCR for a business loan?

DSCR (Debt Service Coverage Ratio) measures how many times your net operating income covers your debt payments. It's calculated as: Net Operating Income ÷ Annual Debt Payments. A DSCR of 1.0 means income exactly covers payments; 1.25 means income is 25% above payments. Most lenders require a DSCR of 1.25 minimum. SBA lenders typically want 1.25–1.35. Below 1.0 means the business can't cover its debt from operations — a major red flag.

What is a personal guarantee on a business loan?

A personal guarantee is a legal commitment that makes you personally responsible for repaying the business loan if the business defaults. This means the lender can pursue your personal assets (savings, home equity, personal property) to satisfy the debt. Most business loans under $1 million require a personal guarantee from all owners with 20%+ ownership. Unlimited personal guarantees cover the full debt; limited guarantees cap your personal exposure at a specific amount.

What is the difference between secured and unsecured business loans?

A secured loan requires you to pledge collateral — specific assets (equipment, real estate, inventory, receivables) the lender can seize if you default. An unsecured loan has no specific collateral requirement, though most still require a personal guarantee. Secured loans typically offer lower rates because the lender has less risk. Unsecured loans are faster to obtain but come at higher rates and are harder to qualify for without strong credit and revenue.

What does "prepayment penalty" mean on a business loan?

A prepayment penalty is a fee charged if you pay off your loan before the agreed term ends. It compensates the lender for the interest income they lose when you repay early. Common structures: a percentage of remaining balance (e.g., 2%), a fixed fee, or "step-down" penalties that decrease over time (3% in year 1, 2% in year 2, 1% in year 3). Always ask about prepayment penalties before signing — they can significantly affect your total cost if you plan to refinance or pay off early.