Small Business Funding Glossary

Accounts receivable represents a business's outstanding invoices — sales completed but not yet collected. Lenders may use A/R as collateral for secured lines of credit or finance the receivables directly through invoice factoring or invoice financing. Strong A/R management (low days sales outstanding, low concentration of risk in any single customer) improves a business's borrowing terms.

ACH is the electronic funds transfer system overseen by Nacha (the National Automated Clearing House Association) that handles trillions of dollars in transactions annually. In small business funding, ACH is the primary mechanism for both disbursing loan/MCA proceeds to your business account and for automatic repayment debits. ACH transfers typically settle within 1-3 business days.

In an amortizing loan, each periodic payment includes some principal repayment and some interest. Early payments are mostly interest; later payments are mostly principal. The total payment stays the same in a fixed-rate amortizing loan, but the proportion shifts over time. SBA loans, conventional bank term loans, and most equipment financing use amortization. MCAs and revenue-based financing typically don't.

APR includes the interest rate plus origination fees, servicing fees, and most other costs of borrowing — making it more useful for comparison than a simple interest rate. For products that don't quote APR (MCA factor rates, RBF revenue shares), an APR-equivalent can be calculated to enable comparison. Federal lending laws require APR disclosure on most consumer loans; small business loan APR disclosure varies by state and product type.

ARR equals MRR × 12 in steady state; it represents the value of all active subscription contracts annualized. RBF lenders for SaaS typically require minimum ARR thresholds (Capchase: $100K+ ARR; Lighter Capital: $200K+ ARR) and price advances as a percentage of ARR (often 20-60% of ARR available as upfront capital).

Balloon payments occur when a loan amortizes over a longer period than its term (e.g., a 25-year amortization with a 7-year term). The borrower makes lower monthly payments calculated on the longer amortization schedule, but owes the remaining balance as a single payment at term end. Balloon payments require the borrower to refinance, sell the asset, or pay from cash reserves at maturity.

BBB ratings range from A+ to F based on a complex algorithm including complaint volume relative to business size, complaint resolution rates, transparency of business practices, and time in business. BBB is a Tier 3 source — useful for synthesizing customer experience signals but not authoritative for product features or pricing.

A blanket lien (filed via UCC-1) gives the lender a security interest in essentially all business assets — equipment, inventory, accounts receivable, intellectual property, etc. — even though no specific asset was pledged. Multiple blanket liens from different lenders create stacking issues; many lenders won't fund if a prior blanket lien is active.

RBF contracts specify a repayment cap as a multiple of the original advance. A $500,000 advance with a 1.8x cap means you repay a maximum of $900,000 total. Once the cap is reached, the obligation ends regardless of how much revenue your business generates. Cap multiples typically range 1.5x–3x. Faster-growing businesses hit the cap sooner, which counterintuitively means they pay a higher effective APR than slow-growing businesses on the same RBF terms.

CDFIs are mission-driven lenders that focus on low-income, minority-owned, women-owned, and rural small businesses. They often issue SBA Microloans, offer technical assistance alongside capital, and price below-market when supporting target communities. CDFIs receive Treasury support and often grant funding that allows them to take risks commercial lenders won't.

A confession of judgment is a pre-signed legal document that authorizes the lender to enter judgment against the borrower in court without notice if the borrower defaults — bypassing normal due process. Historically common in commercial lending, COJ became controversial when used against small business borrowers who didn't realize what they signed. New York banned COJ enforcement against out-of-state defendants in 2019; other states still permit them. Always verify whether a contract includes a COJ before signing.

The credit elsewhere test is fundamental to SBA loan eligibility — SBA's role is to fill gaps in private lending, not to compete with banks for prime borrowers. Lenders document the test by showing why conventional financing was unavailable, declined, or offered on terms substantially worse than SBA terms. The test is one reason highly creditworthy borrowers with abundant capital options sometimes get SBA loans declined despite strong financials.

Lenders evaluate customer concentration because losing a single major customer can be existentially threatening to a small business with concentrated revenue. Most lenders prefer no single customer represents more than 25% of revenue; some won't fund if any customer exceeds 50% concentration. Diversified revenue from many smaller customers signals lower risk and earns better pricing.

DSO is calculated as (Accounts Receivable ÷ Total Credit Sales) × Number of Days. A business with $100K in A/R and $1M in annual credit sales has a DSO of 36.5 days. Industries vary widely (retail near zero; B2B professional services 45-90 days). Businesses with high DSO are candidates for invoice factoring or A/R-secured lines of credit.

DSCR equals (Net Operating Income ÷ Total Debt Service). A DSCR of 1.0 means cash flow exactly covers debt payments — no margin for error. SBA 7(a) requires 1.15x minimum; most banks prefer 1.25x+. Higher DSCR earns better rates, larger loan sizes, and more flexible underwriting. DSCR is the single most important metric for SBA loan approval after personal credit.

Defeasance allows the borrower to release the original collateral by replacing the loan with a portfolio of Treasury bonds that produces the same cash flow as the remaining loan payments. Because Treasury yields are typically lower than commercial loan rates, the cost of buying enough Treasuries can be substantially more than the loan's remaining principal — making defeasance the most expensive prepayment penalty type.

When a business raises equity capital, new shares are issued, reducing existing shareholders' ownership percentages. Founders concerned about giving up control or future value often prefer non-dilutive financing options (RBF, venture debt, term loans) even at higher upfront cost. The math: if RBF costs you $500K extra interest over 3 years but preserves 20% equity in a $50M exit, you net $9.5M vs. equity dilution.

A draw is a discrete withdrawal from your available credit limit. With a revolving line, repaying a draw refills your available credit. Online lenders often charge draw fees ranging from 1.6% to 8.99% per draw; bank LOCs typically don't. Draw fees can dramatically increase the effective cost of LOC borrowing — a 3% draw fee on a $20K draw repaid in 30 days is equivalent to a 36% APR on that draw alone.

When a product doesn't quote APR (MCA, RBF, factoring), calculating effective APR allows apples-to-apples comparison with traditional loans. For an MCA: ((Factor Rate − 1) × 365) ÷ Repayment Days = approximate effective APR. The same factor rate produces dramatically different effective APRs depending on repayment speed.

SBA 7(a) loans for business acquisition typically require 10% equity injection from the buyer. Until recently, this had to come from the buyer's cash. As of 2026, SBA permits seller-financed standby notes (where the seller's note is fully subordinated and on standby for 24+ months) to count toward the 10% — enabling some buyers to acquire businesses with 0% out-of-pocket cash if the seller is willing to standby-finance.

A factor rate of 1.30 on a $50,000 advance means you repay $65,000 total — period. Unlike an interest rate that compounds on remaining principal, factor rates produce a fixed total repayment amount determined at signing. This makes the effective APR depend entirely on repayment speed: 1.30 over 6 months ≈ 60% APR; 1.30 over 3 months ≈ 120% APR. Always convert factor rates to effective APR for comparison shopping.

The Federal Reserve sets a target range for the fed funds rate, currently 3.50%–3.75% (post-December 2025 cut). The rate influences virtually all US lending: prime rate sits ~3% above fed funds, mortgage rates and SBA loan rates derive from prime, even credit card APRs adjust to fed funds changes.

FICO (named for Fair Isaac Corporation) scores incorporate payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%). Score thresholds: 800+ exceptional, 740-799 very good, 670-739 good, 580-669 fair, below 580 poor. SBA loans typically require 680+; MCAs accept 500+.

Fixed rates provide payment certainty — your payment never changes. Variable rates float with a benchmark; they go down when rates fall (saving you money) and up when rates rise (costing you more). In a falling-rate environment, variable wins. In a rising-rate environment, fixed wins. SBA 7(a) loans can be either; SBA 504 are fixed; most online lenders use fixed rates; most bank LOCs use variable.

Gross margin equals (Revenue − Cost of Goods Sold) ÷ Revenue. SaaS businesses typically have 70-85% gross margins (low marginal cost to serve additional customers). Restaurants typically have 20-35% (high food costs). Manufacturing varies 15-50%. Lenders use gross margin to assess whether a business has financial cushion to service debt.

For FY2026: 2% on loans up to $150K, 3% on $150K-$700K, 3.5% on $700K-$1M, 3.75% on guaranteed portions over $1M. NAICS sectors 31-33 (small manufacturers) had this fee waived in FY2026. Plus an annual servicing fee of 0.55% on outstanding guaranteed balance, which cannot be charged to the borrower.

Hard inquiries occur when a lender pulls your credit specifically for an underwriting decision. They appear on your credit report for 24 months and impact FICO for ~12 months. Soft inquiries (pre-qualification, account monitoring) don't impact FICO. Most online lenders use a soft pull for initial offers and convert to hard pull only when you accept.

HELOCs typically offer the lowest interest rates available to small business owners (currently 8-9% APR vs. SBA's 9.75%-13.25%) because they're secured by real estate. The tradeoff: defaulting on a HELOC used for business purposes can cost you your home.

Holdback rate is the percentage of daily card sales (in MCA Split arrangements) or daily ACH deposits (in ACH-based MCAs) that automatically routes to the MCA provider until the advance is fully repaid. A 15% holdback on a business doing $10K daily means $1,500 per day to the MCA. Holdback rates are negotiable in some contracts; lower holdback extends repayment timeline but improves daily cash flow.

In factoring, the factor advances 70-95% of an invoice's value upfront, then collects from your customer when the invoice is paid. Once collected, the factor pays the remaining percentage minus their discount fee (typically 1-5% of invoice value per month outstanding). Recourse factoring requires you to buy back uncollectable invoices; non-recourse factoring transfers default risk to the factor.

ISOs aggregate small business funding applications and route them to lenders best matched to the borrower's profile. Lenders pay ISOs commissions on placed deals (typically 1-8% depending on product). The ISO model exists because no single lender serves all credit profiles or product types.

SBA 7(a) interest equals base rate (typically WSJ Prime, 6.75%) + lender markup. SBA caps the markup: maximum 3.0% for loans over $350K (so max rate 9.75% currently); 4.5% for $250K-$350K (max 11.25%); 6.0% for $50K-$250K (max 12.75%); 6.5% for under $50K (max 13.25%).

MRR includes all recurring subscription revenue normalized to a monthly basis (annual contracts ÷ 12). RBF lenders use MRR as the primary qualification signal: Founderpath accepts $10K+ MRR; Capchase requires $100K+ ARR; Lighter Capital requires $200K+ ARR.

NDR equals (starting MRR + expansion − churn − contraction) ÷ starting MRR, measured over a 12-month cohort. NDR > 100% means existing customers are net-expanding even accounting for churn. Best-in-class SaaS shows 110-130% NDR.

Recourse loans (which include essentially all small business loans with personal guarantees) allow lenders to pursue the owner's personal assets — bank accounts, real estate, future earnings — if business assets don't satisfy the debt. Non-recourse arrangements limit lender collection to the specifically pledged collateral.

A personal guarantee makes the business owner personally liable for business debt — meaning a default can result in collection against personal assets, wage garnishment, and personal bankruptcy. Spousal guarantees may be required in community-property states. PGs survive business closure: even if you shut down the business, the obligation continues.

PLP lenders have demonstrated track records with SBA and earned authority to make SBA loan decisions independently. A standard SBA 7(a) goes to SBA for separate review (adding 2-4 weeks); a PLP-approved 7(a) skips that step (saving weeks). Choosing a PLP lender is one of the highest-leverage decisions for SBA loan timeline.

SBA 7(a) loans have prepayment penalties only in the first 3 years if maturity is 15+ years (5%/3%/1% in years 1/2/3). Conventional commercial loans often have step-down schedules (5%/4%/3%/2%/1%). CMBS loans use defeasance. Many online term loans have no prepayment penalty — verify before assuming.

WSJ Prime Rate is currently 6.75% (effective December 10, 2025, after the Fed's Q4 2025 rate cut). Most variable-rate small business loans price as Prime + a markup. SBA 7(a) maximum rates are pegged to Prime.

Approximately 80% of MCA contracts include reconciliation clauses. The clause obligates the MCA provider to adjust the holdback rate downward if revenue drops below specified thresholds — preserving the legal characterization of the transaction as a "purchase of receivables" rather than a "loan." Knowing how to invoke reconciliation can save businesses in slow seasons.

Most business LOCs are revolving — your available credit refills as you repay. Some specialized LOCs (particularly some SBA Lines of Credit) are non-revolving: once drawn and repaid, the line is closed.

SBA SOPs are dense regulatory documents (1,000+ pages) that lenders must follow. SOP 50 10 governs the 7(a) program; SOP 50 30 governs SBA Microloans. When SBA announces new rules, the SOP is the authoritative source.

SOFR is published daily by the New York Fed and reflects the cost of overnight borrowing collateralized by US Treasuries. It replaced LIBOR as the primary benchmark for variable-rate commercial lending. As of March 1, 2026, SBA permits 30-Day SOFR as an alternative to WSJ Prime as the base rate for variable 7(a) loans.

When a business takes a second or third MCA while a first is still outstanding, the daily holdback debits compound — sometimes consuming 40-60% of daily revenue. Most modern MCA contracts include "no additional debt" clauses; stacking can trigger default acceleration on existing positions. Stacking is a sign of distress, not strategy.

When acquiring a business, SBA traditionally required 10% equity injection from the buyer's cash. Recent SBA rule changes allow seller-financed standby notes to count: the seller takes back a note from the buyer that pays nothing for 24+ months and is fully subordinated to SBA debt. This effectively allows acquisition with 0% out-of-pocket if the seller is willing.

Lenders measure TIB from incorporation/formation date. SBA prefers 2+ years; bank term loans typically 2+ years; online term loans 1+ year; LOCs 1-2 years; MCAs 6+ months. Newer businesses face higher denial rates and worse pricing where they qualify at all.

As of April 2026: 5-year Treasury 4.02%, 10-year Treasury 4.40%, both up roughly 10 basis points from start of year. SBA 504 rates are tied to 10-year Treasury plus spreads. Commercial mortgages often price as Treasury + spread.

UCC-1 filings are public records visible to any other lender researching your business. They establish priority — first to file generally has first claim on the secured assets in default. Multiple UCC filings make new lenders nervous (existing lenders have first claim on assets). UCC-1 filings expire after 5 years unless extended.

UDAP standards require lenders to provide accurate disclosures, avoid deceptive marketing, and refrain from abusive practices. The CFPB enforces UDAP in consumer lending; FTC enforces in commercial. UDAP enforcement actions against MCA providers since 2020 have addressed misleading APR disclosures, hidden fees, and aggressive collection practices.

Usury laws vary dramatically by state. Some states (Delaware, South Dakota) effectively have no commercial usury limits — which is why many lenders incorporate there. MCAs are typically structured to fall outside loan classifications and thus outside usury limits — but courts in NY, CA, NJ have ruled that some MCA contracts function as disguised loans subject to usury law when they bear minimal repayment risk.

Venture debt is typically issued by specialty lenders (Hercules Capital, Western Technology Investment, TriplePoint Capital) to companies that have raised institutional equity. Structure: 2-4 year term, interest rates 8-15%, plus warrants (rights to buy equity at preset price) as additional lender compensation. Used primarily to extend runway between equity rounds at higher valuations.

Yield maintenance penalties make the lender "whole" by charging a premium that, when invested at current Treasury rates, produces the same yield as continuing the loan to maturity. In a falling-rate environment, yield maintenance penalties are larger. In rising-rate environments, yield maintenance can be near zero. Less expensive than defeasance but more variable.