Glossary

The language of commercial capital, decoded.

If a funder uses a term you do not recognize, that is a problem with the funder. Here is every word you are likely to meet in a term sheet, in plain English.

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A B C D E F H I L M N P R S T U W

A

ACH Debit: An Automated Clearing House debit is an electronic withdrawal pulled directly from a business bank account to repay a merchant cash advance or loan. Most alternative funding products collect payments through daily or weekly ACH debits rather than a single monthly invoice, which lets the funder align collections with the business's actual cash flow.
Amortization: Amortization is the process of paying off a debt over time through scheduled payments that cover both principal and interest. In commercial lending, an amortization schedule shows how much of each payment reduces the balance versus covers finance charges, helping a business owner understand the true cost and payoff timeline of a loan.
Annual Percentage Rate (APR): APR expresses the total yearly cost of financing, including interest and certain fees, as a percentage of the amount borrowed. Because merchant cash advances use factor rates instead of interest rates, lenders often calculate an effective APR so business owners can compare the cost of an advance against other financing options on a common basis.
Average Daily Balance: Average daily balance is the mean amount of money sitting in a business bank account over a given period, typically calculated monthly. Underwriters review this figure from bank statements to gauge cash flow stability and repayment capacity, since a healthy average daily balance suggests the business can absorb daily or weekly debits.
Accounts Receivable (AR) Financing: Accounts receivable financing allows a business to borrow against the value of its unpaid invoices rather than selling them outright, as with factoring. The business retains ownership and collection responsibility for the receivables while using them as collateral to access working capital, often through a revolving credit facility tied to AR balances.

B

Bank-Statement Underwriting: Bank-statement underwriting is a funding decision process based primarily on a business's recent bank deposit and withdrawal history rather than tax returns or extensive financial statements. Funders analyze deposits, average balances, negative days, and existing debits to quickly assess cash flow and approve financing, which is why alternative lenders can often turn around decisions in hours instead of weeks.
Bridge Funding: Bridge funding is short-term financing used to cover a gap until a business secures longer-term capital, closes a sale, or receives an expected payment. It is commonly used to seize time-sensitive opportunities, cover payroll during a transition, or maintain operations while a larger loan or investment is finalized.
Broker Fee Disclosure: A broker fee disclosure is a written statement identifying the commission or fee a commercial finance broker earns for arranging a funding deal. Several states now require brokers to disclose this compensation to the business owner before closing, promoting transparency about who is being paid and how much out of the total transaction.
Buy Rate: The buy rate is the base factor rate or cost a funder offers before any markup added by a broker. Brokers may add a margin on top of the buy rate as their compensation, and increasing disclosure requirements are pushing more transparency around the difference between the buy rate and the rate ultimately presented to the business.

C

CFPB 1071: Section 1071 is a Consumer Financial Protection Bureau rule requiring lenders to collect and report demographic and credit data on small business loan applications, similar to home mortgage disclosure requirements. It aims to increase transparency into small business lending patterns and support fair access to credit, and it affects data collection practices across many commercial funders.
Certificate of Judgment (COJ): A Certificate of Judgment is a court-issued document confirming a monetary judgment against a party, often filed as a confession of judgment tied to a funding agreement. If a business defaults, some contracts allow the funder to file the pre-signed COJ quickly to pursue collection without a lengthy new lawsuit, which is why default terms deserve careful review.
Confession of Judgment: A confession of judgment is a legal document a borrower signs in advance, agreeing that if they default, the funder can obtain a court judgment against them without a standard trial. Many states restrict or have banned their use in commercial financing due to consumer protection concerns, so their enforceability depends heavily on jurisdiction.
Consolidation: Consolidation combines multiple existing debts, such as several merchant cash advances or loans, into a single new financing arrangement with one payment schedule. Business owners pursue consolidation to simplify cash flow management, potentially lower the combined daily or weekly debit amount, and reduce the operational burden of tracking several repayment obligations at once.
Cure Period: A cure period is a set window of time, defined in a funding contract, during which a business can fix a default, such as an NSF or missed payment, before the funder takes further action. Cure periods give borrowers a chance to correct temporary cash flow issues without immediately triggering acceleration or legal remedies.
Cash Flow Loan: A cash flow loan is financing underwritten primarily based on a business's incoming cash flow rather than hard collateral like real estate or equipment. These loans rely on bank statement history and revenue trends to assess repayment ability, making them accessible to service-based businesses that may lack significant physical assets.

D

DBA (Doing Business As): A DBA, or fictitious business name, is a registered trade name a company uses that differs from its legal entity name. Funders verify DBA registrations to confirm the business operating under a storefront or brand name is legitimately connected to the legal entity and bank accounts listed on the funding application.
Debt Service Coverage Ratio (DSCR): DSCR measures a business's net operating income relative to its total debt obligations, showing whether cash flow is sufficient to cover payments. A DSCR above 1.0 indicates the business generates more income than needed to service its debt, and underwriters use this ratio to evaluate repayment capacity before extending additional financing.
Default Trigger: A default trigger is a specific event defined in a funding agreement that constitutes a breach of contract, such as multiple NSFs, blocking ACH access, changing bank accounts without notice, or filing bankruptcy. Once triggered, the funder may accelerate the remaining balance, pursue legal remedies, or enforce a personal guarantee, so understanding these clauses before signing is essential.
Direct Funder: A direct funder provides capital using its own funds rather than brokering the deal to a third-party lender. Working with a direct funder can mean fewer intermediaries, more control over underwriting decisions, and potentially faster closings, since the company approving the deal is also the one disbursing and servicing the funds.
DocuSign Closing: A DocuSign closing refers to executing final funding documents electronically through a secure e-signature platform rather than in person with wet ink. This process, governed by E-SIGN Act consent, allows business owners to review, sign, and return contracts remotely, often letting funders disburse capital the same day the documents are completed.
Draw Period: The draw period is the phase of a line of credit during which a business can access available funds as needed, often followed by a repayment period. During the draw period, interest typically accrues only on the amount actually drawn, giving businesses flexibility to borrow, repay, and re-borrow for ongoing working capital needs.

E

Effective APR: Effective APR is a calculated annualized cost figure derived from a financing product's factor rate, fees, and repayment term, expressed as a percentage for comparison purposes. Because merchant cash advances are not structured as traditional loans, converting the total cost into an effective APR helps business owners compare offers across different funding types on equal footing.
EIN (Employer Identification Number): An EIN is a unique nine-digit number issued by the IRS to identify a business entity for tax purposes, similar to a Social Security number for individuals. Funders require the EIN to verify the business's legal existence, run entity-level background checks, and properly document loan agreements and any UCC-1 filings tied to the company.
Equipment Finance Agreement: An equipment finance agreement is a contract that provides capital specifically to purchase business equipment, with the equipment itself often serving as collateral. Payments are typically fixed and structured over the useful life of the asset, allowing a business to acquire machinery, vehicles, or technology without depleting working capital reserves.

F

Factor Rate: A factor rate is a decimal figure, typically between 1.1 and 1.5, used to calculate the total repayment amount on a merchant cash advance by multiplying it against the funded amount. Unlike an interest rate, a factor rate is fixed and does not compound over time, so the total cost is determined upfront regardless of how quickly the advance is repaid.
FICO Score: A FICO score is a widely used credit scoring model ranging from 300 to 850 that summarizes an individual's creditworthiness based on payment history, utilization, and other factors. In commercial funding, a business owner's personal FICO score is frequently reviewed alongside business performance since many owners provide a personal guarantee on the financing.
Funding Wire Cutoff: The funding wire cutoff is the daily deadline by which signed documents and verification must be completed for a funder to send that day's disbursement via wire transfer. Deals finalized after the cutoff time are typically funded the next business day, making timing important for business owners who need capital urgently.

H

Hard Credit Pull: A hard credit pull is a formal credit report inquiry that can temporarily lower a credit score, typically performed when a business owner formally applies for financing and authorizes full underwriting review. It differs from a soft pull, which does not affect credit scores and is often used for prequalification before a final offer is made.
Holdback: A holdback is the percentage of a business's daily credit card or bank deposits withheld to repay a merchant cash advance. Unlike a fixed daily debit, a percentage-based holdback fluctuates with the business's actual sales volume, so repayment naturally slows during slower periods and speeds up during stronger revenue months.

I

Intercreditor Agreement: An intercreditor agreement is a contract between two or more funders holding claims against the same business, establishing the priority and rights of each party's position. These agreements are common when a business has multiple advances or loans outstanding and help clarify who gets paid first in the event of default or liquidation.
Inventory Financing: Inventory financing provides capital specifically to purchase stock or goods for resale, often using the inventory itself as collateral. Retailers, wholesalers, and distributors use this financing to stock up ahead of peak seasons or fulfill large orders without tying up cash reserves needed for daily operating expenses.
Invoice Factoring: Invoice factoring is a financing arrangement in which a business sells its outstanding accounts receivable to a factoring company at a discount in exchange for immediate cash. The factor then collects payment directly from the business's customers, making this option attractive for companies with slow-paying clients but strong receivables.

L

Line of Credit: A business line of credit is a flexible financing arrangement that allows a company to draw funds up to an approved limit, repay, and borrow again as needed. Interest is generally charged only on the outstanding drawn balance, making it a useful tool for managing seasonal cash flow gaps or unexpected expenses.

M

Merchant Cash Advance (MCA): A merchant cash advance is a purchase of a business's future receivables in exchange for an upfront lump sum, repaid through a fixed daily or weekly debit or a percentage holdback of sales. MCAs are not structured as loans and typically rely on bank-statement underwriting, making them a fast-access option for businesses that may not qualify for traditional bank financing.
MCA Syndication: MCA syndication occurs when multiple funders pool capital to fund a single merchant cash advance deal, sharing the risk and return according to each party's contribution. This allows funders to participate in larger deals than they could underwrite alone while spreading exposure across several investors or funding companies.

N

NSF (Non-Sufficient Funds): An NSF occurs when a scheduled debit is returned because a business bank account lacks enough funds to cover it. Frequent NSFs during underwriting can signal cash flow strain and affect approval terms, while NSFs after funding may trigger contractual default provisions, fees, or a request for additional documentation.

P

Personal Guarantee: A personal guarantee is a commitment by a business owner to personally repay a debt if the business itself cannot. It is common in small business financing because many companies lack the credit history or assets to qualify on their own, and it gives funders recourse to the guarantor's personal assets in the event of default.
Prepayment Discount: A prepayment discount is a reduction in the total amount owed on a merchant cash advance or loan if the business pays off the balance early. Not all agreements include this benefit, so business owners should confirm whether early payoff actually reduces cost or whether the full factor-rate amount remains due regardless of timing.

R

Reconciliation Clause: A reconciliation clause is a provision in a merchant cash advance agreement allowing the daily or weekly debit amount to be adjusted periodically to match the business's actual sales volume. This clause is intended to keep the repayment structured as a true percentage of receivables, which is part of what distinguishes an MCA from a fixed-payment loan.
Refinance: Refinancing replaces an existing debt obligation with a new one, typically to secure better terms, a lower payment, or additional capital. In alternative lending, refinancing an existing advance or loan can free up cash flow, though it is important to compare the total cost of the new agreement against what remains on the current one.
Revenue-Based Financing: Revenue-based financing provides capital in exchange for a percentage of a business's ongoing revenue until a set repayment amount is reached. Because payments scale with actual sales, this structure can ease the burden during slower periods, making it popular among businesses with variable or seasonal income streams.
Renewal Funding: Renewal funding is additional capital offered to a business that has already paid down a portion of an existing advance or loan with the same funder. Renewals typically use updated performance and payment history to streamline approval, often providing fresh working capital without requiring a completely new underwriting process from scratch.

S

SBA 7(a) Loan: The SBA 7(a) loan program is the U.S. Small Business Administration's primary vehicle for guaranteeing a portion of loans made by approved lenders to small businesses. These loans typically offer longer terms and lower rates than alternative financing but involve more extensive documentation and longer approval timelines than direct funders.
Seasonality: Seasonality refers to predictable fluctuations in a business's revenue tied to time of year, such as increased sales during holidays or slow periods during off-seasons. Underwriters consider seasonality when structuring repayment terms, and some financing products offer flexible or percentage-based repayment to account for these natural cash flow cycles.
Soft Credit Pull: A soft credit pull is a credit check that does not impact a credit score, often used during initial prequalification to estimate financing options before a formal application. Funders may use soft pulls to present preliminary offers, reserving a hard pull for later in the process once the business owner decides to move forward.
Stacking: Stacking refers to taking on multiple merchant cash advances or loans simultaneously, often from different funders, without full disclosure to each provider. While it can provide additional short-term capital, stacking increases total daily debits and default risk, and many funding agreements explicitly prohibit taking on new advances during the repayment term.
State Commercial Financing Disclosure Laws: These are state-level laws requiring commercial financing providers to disclose standardized cost and payment information, similar to consumer lending disclosures, before a business finalizes a deal. States such as California, New York, Utah, Virginia, and Florida have adopted or considered versions of these laws to improve transparency in small business financing.
Same-Day Funding: Same-day funding refers to the ability to complete underwriting, sign documents, and receive disbursed capital all within one business day, assuming the funding wire cutoff has not passed. This speed is a defining feature of many alternative lending products compared to traditional bank loans, which can take weeks to close.
Sweep Account: A sweep account is a dedicated bank account set up to automatically transfer funds for daily or weekly debit repayments on a merchant cash advance. Using a sweep account can simplify cash management and provide a clear record of repayment activity separate from the business's primary operating account.

T

Term Sheet: A term sheet is a preliminary document outlining the key proposed terms of a financing offer, including amount, factor rate or interest rate, repayment structure, and fees, before final contracts are drafted. It allows a business owner to review and negotiate the core deal points prior to committing to a binding agreement.
Time in Business: Time in business refers to how long a company has been operating, typically measured from its formation or first revenue-generating activity. Many funders set minimum time-in-business requirements, often six months to two years, as an indicator of operational stability and reduced risk compared to brand-new startups.

U

UCC-1 Filing: A UCC-1 financing statement is a legal filing made under the Uniform Commercial Code that publicly notices a lender's security interest in a business's assets. Funders file UCC-1s to establish priority claims against collateral, and businesses can check public UCC records to see which parties currently hold liens against them.
Underwriting: Underwriting is the process by which a funder evaluates an applicant's risk profile, including bank statements, credit history, time in business, and industry, to decide whether to approve financing and on what terms. In alternative lending, underwriting is often streamlined and automated to allow same-day or next-day funding decisions.

W

Working Capital: Working capital is the money a business has available for day-to-day operations, calculated as current assets minus current liabilities. Working capital financing is designed to supply short-term cash for expenses like payroll, inventory, and rent, helping a business maintain smooth operations between revenue cycles.

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