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Business Loan Resources

Business Loan Glossary Index

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Accelerated Depreciation - An accounting method that allows a company to write off an asset's cost at a faster rate than the traditional method. It often results in a larger tax deduction on a company's income statement.
Accounts Payable - Trade accounts of businesses representing obligations to pay for goods and services received.
Accounts Receivable - Trade accounts of businesses representing moneys due for goods sold or services rendered evidenced by notes, statements, invoices, or other written evidence of a present obligation.
Adjustable Rate Loan - A loan with an interest rate that changes periodically, according to an index that is selected when the loan is issued. The initial interest rate is lower than that of fixed-rate loans, but monthly payments can go up or down as the rate is adjusted. (Also known as a variable rate loan.)
Adjustment Interval - The period of time between changes in the interest rate for an adjustable-rate loan. Typical adjustment intervals are one year, three years, and five years.
Amortization - The process of paying the principal and interest on a loan through regularly scheduled installments.
Appraisal - An estimate of the value of a property, made by a qualified professional called an appraiser.
Assets - The entire property of a person, association, corporation, or estate applicable or subject to the payment of debts.
Automated Clearing House (ACH) - A nationwide electronic funds transfer network that enables participating financial institutions to distribute electronic credit and debit entries to bank accounts and to settle such entries.
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Balance Sheet - Financial statement listing a company's assets, liabilities, and equity on a specific date.
Balloon (Payment) Loan - Usually a short-term fixed-rate loan that involves small payments for a certain period of time and one large payment for the remaining principal balance, due at a time specified in the contract. A balloon payment is also known as a call date.
Basis Point - 1/100th of 1% expressed as margin over index rate.
Book Value - The value of an item or property at a specific time after deducting depreciation from original cost.
Break-Even Point - The break-even point in any business is that point at which the volume of sales or revenues exactly equals total expenses—the point at which there is neither a profit nor loss—under varying levels of activity. The break-even point tells the manager what level of output or activity is required before the firm can make a profit and reflects the relationship between costs, volume, and profits.
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Cap - The maximum that an adjustable-rate loan may increase, regardless of index changes. An interest rate cap limits the amount the interest can change, while a payment cap limits the increase in monthly payment to a specific dollar amount.
Capital - (1) Assets less liabilities, representing the ownership interest in a business, (2) a stock of accumulated goods, especially at a specified time and in contrast to income received during a specified time period, (3) accumulated goods devoted to the production of goods, and (4) accumulated possessions calculated to bring income.
Capital Expenditures - Line items on a profit and loss statement that would not be expensed on an annual basis. This category includes replacement of major building systems, such as roofs and driveways.
Closing - The meeting between the buyer, seller, and lender (or their agents) where the property and funds legally change hands. Also referred to as "settlement."
Closing Costs - The costs and fees associated with the official change in ownership of the property and with obtaining the loan; assessed at the closing or settlement.
Collateral - Property acceptable as security for a loan or other financial obligation.
Commercial Loan - A short-term renewable loan used to finance a company's immediate working capital needs.
Comparative Market Analysis - An estimate of the value of a property based on an analysis of sales of properties with similar characteristics.
Current Ratio - The ratio of current assets to liabilities. Also called "quick ratio."
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Debt Service - The periodic payments (principal and interest) made on a loan.
Debt Service Coverage Ratio (Or Debt Coverage Ratio) - Measures a property's ability to cover monthly payments, defined as the ratio of net operating income over the loan payments. A DSCR of less than 1.0 means that there is insufficient cash flow generated by the property to cover required debt payments.
Depreciation - A decline in the value of property. The opposite is appreciation.
Direct Deposit - The deposit of funds directly into a bank account as a form of payment. Common uses for direct deposit include paychecks and tax refunds.
Down Payment - The amount of cash injected by the borrower as a show of good faith toward a financial obligation.
Due Diligence - The legal definition: a measure of prudence, activity or assiduity, as is properly to be expected from, and ordinarily exercised by, a reasonable and prudent person under the particular circumstances. In CMBS: due diligence is the foundation of the process because of the reliance securities investors must place on the specific expertise of the professionals involved in the transaction.
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Earning Power - The demonstrated ability of a business to earn a profit, over time, while following good accounting practices. When a business shows a reasonable profit on invested capital after fully maintaining the business property, appropriately compensating its owner and employees, servicing its obligations, and fully recognizing its costs, the business may be said to have demonstrated earning power. Demonstrated earning power is the foremost test of the business risk in pressing upon an application for a loan.
Engineering Report - Report generated by an architect or engineer describing the current physical condition of the property and its major building systems, such as HVAC, parking lot, and roof. The report also determines an amount for calculating replacement reserves, if needed.
Environmental Report - Report generated by qualified environmental firms to determine potential environmental hazards in a building's region or within the building itself.
Environmental Risk - Risk of loss of collateral value and of lender liability due to the presence of hazardous materials, such as asbestos, PCB's, radon or leaking underground storage tanks (LUSTS) on a property.
Equity - The difference between the fair market value and current indebtedness, also referred to as "owner's interest."
Equity Financing - The provision of funds for capital or operating expenses in exchange for capital stock, stock purchase warrants, and options in the business financed, without any guaranteed return, but with the opportunity to share in the company's profits. Equity financing includes long-term subordinated securities containing stock options and/or warrants. Utilized in SBIC financing activities.
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Fair Market Value - An appraisal term for the price which a property would bring in a competitive market, given a willing seller and willing buyer, each having a reasonable knowledge of all pertinent facts, with neither being under any compulsion to buy or sell.
Fiduciary - A person or company entrusted with assets owned by another party (beneficiary), and responsible for investing the assets until they are turned over to the beneficiary.
Fixed Rate Loan - A loan on which the same rate of interest is charged for the life of the loan.
Foreclosure - The process by which a lender takes back a property on which the loan has defaulted. A servicer may take over a property from a borrower on behalf of a lender.
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Grace Period (Credit Card) - The period of time between the statement date and the payment due date in which no interest is charged if the balance due is paid in full and on time.
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Index - An economic indicator, usually a published interest rate, which determines changes in the interest rate of an adjustable-rate loan. ARM rates are adjusted to reflect changes in the index. The margin is the amount a lender adds to the index to establish the actual interest rate on an ARM.
Insolvency - The inability of a borrower to meet financial obligations as they mature, or having insufficient assets to pay legal debts.
Installment Loan - One in which the amount of interest is added to the principal and repaid by the borrower in equal periodic payments.
Interest - The sum paid for borrowing money, which pays the lender's costs of doing business.
Interest Rate - The sum charged for borrowing money, expressed as a percentage.
Interest Rate Cap - Limits the interest rate or the interest rate adjustment to a specified maximum. This protects the borrower from increasing interest rates.
Interest Shortfall - The aggregate amount of interest payments from borrowers that is less than the accrued interest on the certificate.
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Lease Assignment - An agreement between the commercial property owner and the lender that assigns lease payments directly to the lender.
Leasehold Improvements - The cost of improvements for a leased property, often paid by the tenant.
Liquidation - The disposal, at maximum prices, of the collateral securing a loan, and the voluntary and enforced collection of the remaining loan balance from the obligators and/or guarantors.
Loan Origination Fee - The fee charged by a lender, to prepare all the documents associated with your loan.
Loan-To-Value Ratio (LTV) - The ratio between the principal amount of the loan balance, at origination or thereafter, to the current value of the underlying real estate collateral. The ratio is commonly expressed to a potential borrower as the percentage of value a lending institution is willing to finance. The ratio is dynamic, and varies by such things as lending institution, property type, geographic location, and property size.
Lock-Out Period - A period of time after loan origination during which a borrower cannot prepay the loan.
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Margin - The amount that is added to an index rate to determine the total interest rate.
Maturity - (1) The termination period of a note. A 30-year loan, for example, has maturity of 30 years. (2) In sales law, the date a note becomes due.
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Negative Amortization - This situation occurs when interest accrued during a payment period is greater than the scheduled payment and the excess amount is added to the outstanding loan balance. For example, if the interest rate on an ARM exceeds the interest rate cap, then the borrower's payment will not be sufficient to cover the interest accrued during the billing period. The unpaid interest is then added to the outstanding loan balance.
Net Operating Income (NOI) - Total income less operating expenses, adjustments, and so forth, but before loan payments, tenant improvements and leasing commissions.
Net Worth - Property owned (assets), minus debts and obligations owed (liabilities), is the owner's equity (net worth).
Net-Net Lease (NN) - Usually requires the tenant to pay for property taxes and insurance in addition to the rent.
Non-Recourse - A finance term. A loan or deed of trust securing a note without recourse allows the lender to look only to the security (property) for repayment in the event of default, and not personally to the borrower. A loan not allowing for a deficiency judgment. The lender's only recourse in the event of default is the security (property) and the borrower is not personally liable.
Notice Of Default (NOD) - To initiate a non-judicial foreclosure proceeding involving a public sale of the real property securing the deed of trust. The trustee under the deed of trust records a Notice of Default and Election to Sell ("NOD") the real property collateral in the public records.
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Operating Expense - Periodic expenses necessary to the operation and maintenance of an enterprise (taxes, salaries, insurance, and maintenance, for example). Often used as a basis for rent increases.
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Payroll - The financial record of employees' salaries, wages, bonuses, net pay, and deductions.
Percentage Lease - Commonly used for large retail stores. Rent payments include a minimum or "base rent" plus a percentage of the gross sales "overage." Percentages generally vary from 1% to 6% of the gross sales depending on the type of store and sales volume.
Points (Loan Discount Points) - Prepaid interest on a loan that is usually paid at the time of closing. Each point is equal to 1% of the total amount of a loan (1 point, or 1%, of an $80,000 loan would be $800). Most lenders offer loans with several combinations of points and interest rates; generally, the lower the interest rate, the more points paid at settlement.
Principal - (1) The amount of debt, not including interest, left on a loan. (2) The face amount of the loan.
Property Tax - Taxes based on the market value of a property. Property taxes vary from state to state.
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Rate Index - An index used to adjust the interest rate of an adjustable loan (for example, the change in U.S. Treasury securities (T-Bills) with 1-year maturity). The weekly average yield on said securities, adjusted to a constant maturity of 1 year, which is the result of weekly sales, may be obtained weekly from the Federal Reserve Statistical Release H.15 (519). This change in interest rates is the "index" for the change in a specific Adjustable Loan.
Ratio - Denotes relationships of items within and between financial statements, e.g., current ratio, quick ratio, inventory turnover ratio, and debt/net worth ratios.
Recourse - Personal liability.
Refinance - The renewal of an existing loan by the same borrower.
Replacement Reserves - Monthly deposits that a lender may require a borrower to a reserve in an account, along with principal and interest payments for future capital improvements of major building systems (HVAC, parking lot, carpets, and roofs, for example).
Reserve Funds - A portion of the bond proceeds that are retained to cover losses on the loan pool. A form of credit enhancement (also referred to as "reserve accounts").
Risk - Exposure to the danger or probability of a loss or damage.
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Secondary Financing - A loan secured by a loan or trust deed, in which the lien is junior, or secondary, to another loan or trust deed.
Secondary Loan Market - The buying and selling of first loans or trust deeds by banks, insurance companies, government agencies, and other loans. This enables lenders to keep an adequate supply of money for new loans. The loans may be sold at full value ("par") or above, but are usually sold at a discount. The secondary loan market should not be confused with a "second loan."
Small Business Administration - A part of our federal government, the U.S. Small Business Administration, established in 1953, provides financial, technical and management assistance to help Americans start, run, and grow their businesses. With a portfolio of business loans, loan guarantees and disaster loans the SBA is the nation's largest single financial backer of small businesses.
Spread - Number of basis points over a base rate index.
Structural Report - Report generated by an architect or engineer describing the current physical condition of the property and its major building systems, such as HVAC, parking lot, and roof.
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Tenant Improvements (TI) - The expense to physically improve the property to attract new tenants to new or vacated space, which may include new improvements or remodeling. May be paid by tenant, landlord, or both. Typically, tenants are provided with a market rate TI allowance ($/sq. ft.) that the owner will contribute towards improvements. The tenant must pay for amounts above the TI allowance desired by the tenant.
Term - The length of a loan.
Title - The actual legal document conferring ownership of a piece of real estate.
Title Insurance - An insurance policy that insures you against errors in the title search essentially guaranteeing your, and your lender's, financial interest in the property.
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Underwriting - The process of deciding whether to make a loan based on credit, employment, assets and/or other factors.
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Variable Costs - Those costs of doing business such as cost of goods, shipping, handling and storage, sales commissions, etc. that are directly related to the sales of goods or services.
Venture Capital - Money used to support new or unusual commercial undertakings; equity, risk, or speculative capital. This funding is provided to new or existing firms that exhibit above-average growth rates, a significant potential for market expansion, and the need for additional financing for business maintenance or expansion.
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Wire Transfer - An electronic transfer of funds.
Working Capital - Cash and short-term assets that can be used for current needs.
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