Business Lending Terms Explained

The words in a financing offer decide what it really costs and what you're agreeing to. Here's what the most important ones mean, in plain English. Use them to read any listing on Lender List or any offer you receive.

Cost terms

APR (annual percentage rate): The yearly cost of financing, including interest and most fees, shown as a percentage. APR lets you compare offers with different prices, fees and lengths. A short-term product with a small-looking fee can have a very high APR.

Estimated APR (Lender List est.): Many business lenders don't publish an APR. When they don't, we calculate one from the lender's published pricing and a typical repayment schedule, and label it "Lender List est." Your actual APR depends on your offer. Try our factor rate to APR calculator.

Interest rate: The percentage charged on the amount you borrow, usually per year. Unlike APR, it doesn't include fees.

Factor rate: A multiplier used by merchant cash advances and some short-term loans, usually written as a decimal like 1.2 or 1.4. You repay the amount advanced times the factor rate. A $50,000 advance at a 1.3 factor rate means repaying $65,000. A factor rate is not an interest rate, and the shorter the repayment period, the higher the equivalent APR.

Draw fee: A fee charged each time you take money from a line of credit, often a percentage of the amount drawn.

Origination fee: A one-time fee for setting up the financing, often taken out of the amount you receive. A $100,000 loan with a 3% origination fee may only put $97,000 in your account.

Prepayment penalty / early payoff discount: Some financing charges a fee if you pay early. Others give a discount. With many factor-rate products, the full cost is owed even if you repay early. Every Lender List listing has an "Early payoff" field.

Total cost of capital: Everything you pay beyond the amount you receive: interest, fees and any factor-rate charges. Listings show an example cost to borrow $100,000 for six months.

Repayment terms

Term: How long you have to repay.

Repayment schedule: How often payments are taken: daily (business days), weekly or monthly. Daily and weekly payments can come out of your account before you've had time to collect from customers, which can strain cash flow.

ACH debit: An automatic withdrawal from your business bank account. Most online lenders and cash advance providers collect this way.

Holdback or remittance rate: With a merchant cash advance or sales-based financing, the percentage of your daily sales taken to repay. A 10% holdback means 10% of each day's card sales or deposits goes to the provider.

Reconciliation: A clause in many merchant cash advance contracts that lets you ask for your payments to be adjusted to match your actual sales when revenue drops. Check whether the contract includes it and how to request it.

Revenue-based financing: Financing repaid as a percentage of your revenue, so payments rise and fall with sales. Total cost is usually a fixed fee agreed up front.

Security and risk terms

Personal guarantee: Your promise to repay personally if the business can't. If the business defaults, the lender can pursue your personal assets, depending on state law. Most small business financing requires one.

Collateral: Assets pledged to secure financing, such as equipment, real estate, inventory or receivables. If you don't repay, the lender can take them.

UCC lien (UCC-1 filing): A public notice that a lender has a claim on some or all of your business assets. A "blanket" lien covers everything the business owns. Liens can make it harder to get other financing until they're released.

Confession of judgment (COJ): A contract clause in which the borrower agrees in advance that the lender can get a court judgment without a trial if there's a default. That can lead to frozen bank accounts with little warning. New York stopped accepting them against out-of-state borrowers in 2019, and some other states restrict them. Read any contract carefully for this language.

Default: Failing to meet the terms of the agreement. Contracts often list many default triggers beyond missed payments, such as switching bank accounts or taking on more financing.

Stacking: Taking a new cash advance or loan while one is still being repaid. Stacked daily payments can quickly become more than a business can handle, and many contracts prohibit it.

Product types

Merchant cash advance (MCA): A purchase of a share of your future sales, repaid through a holdback or fixed daily or weekly debits. Fast and easy to qualify for, but often among the most expensive options. It's usually structured as a sale, not a loan, so some lending rules may not apply.

Business line of credit: A credit limit you can draw from as needed, paying only on what you use. Repayments free up the limit to use again.

Term loan: A lump sum repaid in regular payments over a set term.

SBA loan: A loan made by a bank or lender and partly guaranteed by the U.S. Small Business Administration. Usually lower rates and longer terms, but more paperwork and a longer wait.

Invoice factoring: Selling your unpaid invoices to a factoring company for cash now. With recourse factoring, you owe the money back if your customer doesn't pay. With non-recourse factoring, the factor takes on that risk, usually only if your customer goes out of business or can't pay, not if they dispute the invoice.

Purchase order (PO) financing: Financing that pays your supplier so you can fill a large customer order you couldn't otherwise afford.

Inventory financing: Financing used to buy inventory, often secured by that inventory.

Credit checks

Soft pull: A credit check that doesn't affect your credit score. Many online lenders use one to pre-qualify you.

Hard pull: A full credit inquiry that can lower your score slightly. Usually happens when you submit a full application, before final approval, or when you first draw funds.

Know your rights

California and New York require many commercial financing providers to show an estimated APR on offers. Several other states require other cost disclosures, such as the total amount you'll repay. If an offer doesn't show you the total amount you'll repay, ask for it in writing before you sign.

This page is general information, not legal or financial advice.