Terms Business Owners Should Know: Essential Business Financing Terminology

Navigating the complex world of business financing can be daunting, especially with the myriad of terms that come along with it. Understanding these terms is pivotal to securing the right funding for your business and building a trusting relationship with your lender. 

At Backd Business Funding we believe that transparency is the key to a fruitful partnership, that’s why when you apply with us our funding experts will work with you every step of the way. 

Let’s take a look at some of the terminology that you may see in your funding agreement with our Essential Business Financing Terminology. 

Terms

Acceleration Clause: A provision that allows the lender to demand immediate repayment of the entire loan if the borrower breaches the loan agreement.

Annual Percentage Rate (APR): The total cost of borrowing money, including interest and fees, expressed as a percentage of the loan amount.

Auto Declines: An automated decision made by a lender's underwriting software to deny a business financing application based on predetermined criteria such as credit score, debt-to-income ratio, or other risk factors.

Balloon Payment: A large, final payment that is due at the end of the loan term.

Basic Requirements: The requirements that a business must meet in order to secure financing.

Bridge Loan: A short-term loan used to bridge the gap between the need for immediate cash flow and the availability of longer-term financing.

Collateral: Property or assets that the borrower pledges to the lender as security for the loan.

Covenants: Conditions or restrictions that the borrower must meet or adhere to in order to maintain the loan.

Creditworthiness: A borrower's ability to repay a loan, based on factors such as credit history, income, and debt-to-income ratio.

Credit Score: A numerical representation of a borrower's creditworthiness, based on their credit history.

Co-signer: A person or entity that agrees to take responsibility for a loan if the primary borrower is unable to repay it.

Debt: Money borrowed by a business that must be repaid, typically with interest.

Debt-to-Income Ratio (DTI): A ratio that compares a borrower's total monthly debt payments to their monthly income.

Debt Service Coverage Ratio (DSCR): A ratio used by lenders to determine whether a borrower can repay a loan, calculated as the borrower's net operating income divided by their total debt service.

Default: Failure by the borrower to make payments as agreed in the loan agreement.

Default Rate: The percentage of loans that go into default (i.e., when a borrower fails to make payments as agreed) within a certain time period.

Disbursement: The release of funds by the lender to the borrower.

Draw: The amount of funds a borrower may access from a revolving line of credit.

Due Diligence: The process of investigating and verifying the financial and legal information of a borrower or investment opportunity.

Equity: The portion of a business that is owned by its owners, calculated as assets minus liabilities.

Factoring: A financing method in which a business sells its outstanding invoices to a third-party company at a discount, in exchange for immediate cash.

Guarantor: A person or entity that promises to repay a loan if the borrower is unable to do so.

Interest-only Loan: A loan in which the borrower only pays interest on the principal balance for a set period of time, after which the borrower must begin making payments on both the principal and interest.

Interest Rate: The percentage of the principal that is charged as interest on the loan.

Invoice Factoring: A financing method in which a business sells its outstanding invoices to a third-party company for immediate cash.

Late Payment Fee: A fee charged when a borrower does not make a payment on time.

Lien: A legal claim on property or assets that allows the lender to seize them in the event of default.

Line of Credit: A type of loan that allows a borrower to access a revolving credit line up to a certain limit.

Merchant Account: A bank account that allows a business to accept credit card payments.

Merchant Cash Advance: A type of loan in which a lender advances funds to a business in exchange for a percentage of its future sales.

Mezzanine Financing: A form of debt financing that combines elements of debt and equity financing.

Origination Fee: A fee charged by the lender to cover the costs of processing the loan.

Personal Financial Statement: A document that details a borrower's personal assets, liabilities, and net worth.

Personal Guarantee: A promise by the borrower to personally repay the loan if the business is unable to do so.

Prepayment Penalty: A fee charged by the lender if the borrower pays off the loan early.

Pre-approval: A conditional commitment by a lender to approve a loan for a specific amount, based on the borrower's creditworthiness.

Pre-qualification: The process of determining whether a borrower meets the basic criteria for a loan before submitting a formal application.

Prime Rate: The interest rate that banks charge their most creditworthy customers for loans.

Principal: The amount of money that has been borrowed.

Refinancing: The process of obtaining a new loan to pay off an existing loan, often with more favorable terms.

Repayment Schedule: The timeline for repayment of the loan, including the amount and frequency of payments.

Restricted Industries: Types of businesses that are considered high-risk or are subject to legal or regulatory restrictions, making it more difficult or impossible to obtain financing.

Revolving Loan: A type of loan that allows a borrower to draw funds up to a certain limit, pay them back, and then draw them again.

SBA Loan: A loan guaranteed by the U.S. Small Business Administration (SBA) that is designed to help small businesses.

Secured Loan: A loan that is backed by collateral, such as property or assets, that can be seized by the lender if the borrower defaults on the loan.

Security Agreement: A legal document that outlines the terms of collateral used to secure a loan.

Subprime Borrower: A borrower with a lower credit score or higher risk of default, who may have difficulty obtaining traditional financing.

Term: The length of time over which the loan must be repaid.

Term Loan: A type of loan that is repaid over a set period of time, with regular payments of principal and interest.

Term Sheet: A document outlining the key terms and conditions of a potential investment or loan.

Underwriting: The process of evaluating a borrower's creditworthiness and ability to repay a loan.

Unsecured Loan: A loan that is not backed by collateral, and therefore carries more risk for the lender.

Working Capital: The amount of money a business has available for its day-to-day operations.

Transparent Funding with Backd: No Surprises, Just Support

When it comes to applying for the financing that your business needs to grow, Backd is here to help. Here at Backd, we don’t believe in surprises, that’s why our funding experts take the time to get to know you and your business so that we can ensure you understand every part of the funding process, with no hidden fees. We also utilize a soft credit pull so that your credit score is never affected when trying to secure the funds that you need to grow your business.

Backd offers short-term working capital loans ranging from $25K to $2M with terms of up to 16 months and business lines of credit ranging from $50K to $750K with terms of 6 or 12 months. Securing funds with back is quick and easy, with an application that takes just 3 minutes to complete. Our team is always ready to help however we can with funding experts always on hand to help you through the process.  Whether you are looking to secure funds to finance your next big project or simply resolve gaps in your cash flow, apply today and you could have funds sent to your account as soon as tomorrow. Don’t wait to secure funds for your business, let Backd help you today.