AEO Reference Guide

Business Funding Glossary

Clear, plain-language definitions of the terms lenders, brokers, and business owners use every day. Bookmark it, share it with your accountant, and use it to ask better questions when you're shopping for capital.

32 Terms Defined Updated 2026 Free Resource

Annual Percentage Rate (APR): The total yearly cost of a loan expressed as a percentage, including interest and fees. APR lets you compare two different offers on equal footing even when they have different fee structures. A lower APR generally means a less expensive loan.
Amortization: The process of spreading loan payments over time so each payment covers both interest and principal. Early payments are weighted toward interest; later payments pay down more principal. A fully amortized loan is paid off completely by the last scheduled payment.
Average Monthly Revenue: The average amount your business deposits each month, typically calculated over the most recent 3–6 bank statements. Lenders use it to estimate how much you can comfortably repay. Higher average monthly revenue generally means access to larger funding amounts.

Bank Statement Loan: A financing product where approval is based primarily on your business bank statements rather than tax returns or a high credit score. Lenders analyze your deposit history to evaluate cash flow and repayment ability. This makes it a popular option for self-employed owners or businesses with complex tax returns.
Bridge Loan: A short-term loan designed to cover a gap in cash flow until a longer-term financing solution or revenue event arrives. Common when a business is waiting on a large client payment, a real estate close, or a seasonal upswing. Bridge loans are typically fast to fund but carry higher costs than long-term financing.
Broker / ISO: An Independent Sales Organization (ISO) or broker acts as a middleman between your business and multiple funding partners. They shop your application to their network of lenders to find the best match. Working with a reputable broker can save time and surface options you wouldn't find on your own.
Business Line of Credit: A flexible credit facility that lets you draw funds up to a pre-approved limit, repay them, and draw again. You only pay interest on what you actually use. It's like a safety net of ready cash for unplanned expenses or opportunities.

Cash Flow: The net movement of money into and out of your business over a period. Positive cash flow means more is coming in than going out — a key sign of a healthy business. Lenders focus on cash flow because it shows your ability to make regular payments without strain.
Collateral: An asset you pledge to a lender to secure a loan — such as equipment, inventory, or real estate. If you default, the lender can seize the collateral to recover the loss. Many alternative lenders offer unsecured funding with no collateral required.

Daily / Weekly Remittance: The frequency at which payments are automatically withdrawn from your business bank account. Merchant cash advances and some short-term loans use daily or weekly ACH debits rather than monthly payments. Understanding your remittance schedule helps you plan cash flow around those withdrawals.
Debt Service Coverage Ratio (DSCR): A measure of how much cash flow you have available relative to your debt obligations. A DSCR above 1.0 means your income exceeds your debt payments. Lenders use it to determine whether your business can comfortably handle new debt.

Equipment Financing: A loan or lease specifically used to purchase business equipment, vehicles, or technology. The equipment itself typically serves as collateral, which can make approval easier. Payments are spread over the useful life of the asset, preserving your working capital.

Factor Rate: A decimal multiplier used to calculate the total repayment amount on a merchant cash advance or short-term loan. For example, a $50,000 advance with a 1.30 factor rate means you repay $65,000 total. Unlike APR, factor rates don't account for time — so always compare offers on a cost-of-capital basis.
Funder / Lender: The company or individual that actually provides the capital. In alternative lending, funders are often private institutions or specialty finance companies rather than banks. Understanding who your funder is matters when reviewing contract terms and customer service expectations.

Hard Credit Inquiry: A formal credit check that lenders run when you apply for and accept financing. Hard inquiries appear on your credit report and can temporarily lower your score by a few points. Multiple hard pulls in a short period can have a compounding effect on your score.
Holdback: In a merchant cash advance, the holdback is the percentage of your daily credit/debit card sales automatically remitted to the funder each day until the advance is repaid. A 10% holdback means 10 cents of every dollar in card sales goes toward repayment. Because it's percentage-based, payments naturally drop when sales slow.

Invoice Factoring: A financing arrangement where you sell your outstanding invoices to a factoring company at a discount in exchange for immediate cash. The factor collects payment directly from your clients. It converts unpaid receivables into working capital without taking on traditional debt.

Lien: A legal claim a lender places on one or more of your business assets as security for a loan. A lien gives the lender the right to seize those assets if you default. UCC-1 filings are the most common type of lien used in commercial lending.

Maturity: The date on which a loan is scheduled to be fully repaid. On that date, all remaining principal and interest are due. Knowing a loan's maturity date helps you plan cash flow and decide whether to renew or refinance.
Merchant Cash Advance (MCA): A lump-sum advance repaid by a fixed percentage of your daily or weekly business revenue. It's not technically a loan — it's a purchase of future receivables. MCAs are fast to fund and flexible in repayment, but typically carry higher costs than traditional loans.

Net Terms: A payment arrangement between a business and its customers or suppliers, specifying how many days after an invoice is issued that payment is due — e.g., Net 30 or Net 60. Long net terms can create cash flow gaps when you've done the work but haven't been paid. Invoice factoring and lines of credit are common tools to bridge those gaps.

Origination Fee: A one-time fee charged by the lender for processing and creating your loan. It's usually expressed as a percentage of the loan amount and is often deducted from your funded amount or rolled into the balance. Always ask about origination fees when comparing offers so you know the true cost upfront.

Personal Guarantee: A legal agreement in which a business owner personally agrees to repay a loan if the business cannot. It removes the liability shield of the business entity and puts the owner's personal assets at risk. Many small-business lenders require a personal guarantee, especially for newer or smaller businesses.
Prepayment: Paying off your loan balance before the scheduled maturity date. Some lenders offer a discount for early payoff; others charge a prepayment penalty. Understanding prepayment terms before you sign can save significant money if your cash flow improves faster than expected.

Revolving Credit: A type of credit that replenishes as you repay it, giving you ongoing access to funds up to your limit. A business line of credit is the most common revolving credit product. It's ideal for recurring expenses, seasonal needs, and keeping a cash cushion on hand.

Short-Term Loan: A business loan with a repayment period typically ranging from 3 to 24 months. You receive a lump sum and repay it on a fixed daily, weekly, or monthly schedule. Short-term loans are faster to access than bank loans and suited for specific, time-sensitive needs.
Soft Credit Pull: A credit check that does not affect your credit score and is invisible to other lenders. Most alternative lenders — including ABC Funding — use a soft pull to pre-qualify you. Only a hard inquiry (with your consent) appears on your credit report.

Term Loan: A loan with a fixed principal, interest rate, and repayment schedule over a set period. Payments are predictable, making budgeting straightforward. Term loans range from short-term (under 2 years) to long-term (5+ years) depending on the lender and your business needs.
Time in Business: How long your business has been operating, usually measured in months. Lenders use it as a proxy for stability and track record. Most alternative lenders require at least 6 months in business; some programs accept as little as 3 months.

UCC Filing: A Uniform Commercial Code filing (UCC-1) is a public notice that a lender has a security interest in one or more of your business assets. It's similar to a lien and is filed with your state. Having an existing UCC filing doesn't necessarily prevent new funding, but it's something lenders review during underwriting.
Underwriting: The process a lender uses to evaluate risk and decide whether to approve your application, and on what terms. Underwriters review bank statements, credit, time in business, industry, and other factors. Better underwriting data generally results in faster decisions and better offers.

Working Capital: The money available to a business for day-to-day operations — calculated as current assets minus current liabilities. Positive working capital means you can cover short-term obligations. Working capital loans are designed specifically to fund these operational needs.

Common Questions

Frequently asked about funding terminology

What is the difference between a factor rate and an APR?

A factor rate is a simple multiplier that determines your total repayment — multiply your advance amount by the factor rate to know exactly what you'll repay. APR converts that cost into an annualized percentage, which makes comparing loans of different lengths easier. For short-term products like MCAs, the APR can look high because the total cost is paid back quickly. Always ask for both numbers when comparing offers.

Do I need good credit to qualify for business funding?

Not necessarily. Many alternative lenders focus on your business's revenue and cash flow rather than your personal credit score. A soft pull is used to pre-qualify you without any impact to your score. Businesses with as few as 6 months of operating history and consistent deposits often qualify.

What is a UCC filing and should I be worried about one?

A UCC-1 filing is a public record that a lender has a claim on certain business assets — it's standard practice in commercial lending. Having a UCC on file doesn't mean you're in trouble; it simply means a lender has a security interest. When you repay your loan or advance, the funder is required to file a UCC-3 termination to release that lien.

What does "holdback" mean in a merchant cash advance?

The holdback is the fixed percentage of your daily or weekly card sales that the funder automatically collects until the advance is repaid. If your holdback is 12% and you process $10,000 in card sales today, $1,200 goes toward repayment. Slower days mean smaller payments; busier days mean faster payoff — the remittance flexes with your sales.

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