The Commercial Finance Glossary: 40 Terms Every Business Owner Should Know Before Talking to a Lender
Knowledge is leverage. When you walk into a financing conversation without understanding the terminology, you're at a disadvantage — not because the lender is trying to take advantage of you, but because you can't fully evaluate what's being offered or ask the right questions.
This glossary is designed to fix that. I've compiled the 40 terms I most commonly find business owners confused about, and I've defined each one the way I'd explain it to a client in my office in Abilene — plainly, practically, with enough context to actually use it.
Bookmark this. Share it with your business partner. And when you're ready to put these terms to work, you know where to find me.
1. Amortization
The process of paying off a loan through scheduled regular payments of principal and interest over time. A fully amortizing loan is paid to zero at the end of the term. Some commercial loans are partially amortizing — they reduce the balance but not to zero — requiring a balloon payment at maturity.
2. Balloon Payment
A large, lump-sum payment due at the end of a loan term that hasn't been fully amortized. Commercial real estate loans often amortize over 25-30 years but mature in 5-10 years, requiring a balloon payoff of the remaining balance — typically handled through refinancing or sale.
3. DSCR (Debt Service Coverage Ratio)
Net Operating Income divided by annual debt service payments. The ratio by which income exceeds debt payments. A DSCR of 1.25x means income covers the payment by 25%. Most commercial lenders require minimum 1.20x-1.35x DSCR. Below 1.0x means the property can't service its debt from its own income.
4. LTV (Loan-to-Value Ratio)
The loan amount divided by the appraised value of the collateral. An 80% LTV loan on a $1M property = $800,000 loan. LTV is the primary tool lenders use to ensure they have adequate collateral coverage.
5. LTC (Loan-to-Cost Ratio)
For construction and development financing: the loan amount divided by total project cost. A 90% LTC on a $5M project = $4.5M loan. LTC is used when there's no completed property to appraise.
6. NOI (Net Operating Income)
Gross rental income minus vacancy minus operating expenses, before debt service. NOI is the primary income metric for commercial real estate. It determines value (via cap rate) and loan sizing (via DSCR).
7. Cap Rate (Capitalization Rate)
NOI divided by property value. The rate of return an investor accepts on a commercial property. In a 7% cap rate market, investors pay $1M for every $70,000 in NOI. Lower cap rates = higher values. Cap rates are determined by market supply and demand for a specific property type in a specific location.
8. Advance Rate
The percentage of eligible collateral value that a lender will advance. An 85% advance rate on A/R means the lender advances $0.85 for every $1.00 of eligible receivables.
9. Borrowing Base
The maximum amount a borrower can draw from a revolving credit line at any point in time, calculated from eligible collateral multiplied by advance rates. Dynamic — it grows when collateral grows and shrinks when collateral shrinks.
10. Eligible A/R
Accounts receivable that meet the lender's criteria for inclusion in the borrowing base. Typically excludes invoices over 90 days old, related-party receivables, disputed invoices, and invoices from customers with excessive concentration.
11. Recourse Loan
A loan where the lender can pursue the borrower personally if the collateral doesn't cover the outstanding balance after default and liquidation. Most small business loans are recourse.
12. Non-Recourse Loan
A loan where the lender's only remedy is the collateral — they cannot pursue the borrower personally for a deficiency. Standard for CMBS loans. Not available for most small business lending.
13. Personal Guarantee
A legal commitment by an individual owner to personally repay a business loan if the business cannot. Required by SBA on all owners with 20%+ stake. Standard for most small business commercial loans.
14. CMBS (Commercial Mortgage-Backed Securities)
Commercial real estate loans that are pooled and sold as securities to institutional investors. Typically fixed-rate, non-recourse, available for larger stabilized commercial properties. Involves complex prepayment provisions.
15. Defeasance
A CMBS loan prepayment mechanism where the borrower replaces the mortgage collateral with a portfolio of government securities that produces the same cash flow as the remaining loan payments. Expensive and complex — more a deficiency than a feature.
16. Yield Maintenance
Another CMBS prepayment provision: the borrower pays a penalty equal to the present value of the remaining interest payments, discounted at a treasury rate. Also expensive — designed to protect the lender's yield if rates have fallen.
17. Mezzanine Financing
Subordinate debt that sits between senior debt and equity in the capital stack. Higher rate than senior debt, lower rate than equity. Available through W. Reynolds Commercial Capital, Inc. at up to 85% LTV. Enables higher leverage than senior debt alone.
18. Preferred Equity
An equity investment with preferential rights — paid before common equity, at a defined preferred return, in a liquidation or distribution. Higher risk than mezzanine debt, lower risk than common equity.
19. Bridge Loan
Short-term commercial financing (typically 12-36 months) for transitional properties or time-sensitive situations. Interest-only during the term. Higher rate than conventional. Designed to be refinanced into permanent financing when the transitional period ends.
20. Hard Money Loan
Short-term, collateral-first real estate loan from a private lender. Fast closing, high rates, primarily underwritten on the property value. Most appropriate for distressed acquisitions, fix-and-flip projects, and deals that need to close quickly.
21. Factoring
The sale (not a loan) of accounts receivable to a third party (the factor) at a discount in exchange for immediate cash. Typical advances: 80–90% of invoice face value, with fees in the 1.5%–2% range for a 30-day window.
22. Advance (Factoring)
The initial cash payment to the seller of an invoice, typically 80-90% of the invoice face value. The reserve — the remaining 10-20% — is released when the customer pays the invoice.
23. Reserve (Factoring)
The portion of the invoice face value held by the factor until the customer pays. Released (minus fees) upon payment.
24. Account Debtor
In factoring, the customer who owes money on the invoice being factored. The account debtor's creditworthiness is the primary underwriting factor. Your customer's credit quality determines your factoring availability.
25. Dilution
In factoring, the reduction in the face value of receivables due to credits, chargebacks, returns, or payment adjustments. High dilution rates reduce the quality of your A/R as factoring collateral.
26. Non-Notification Factoring
A factoring arrangement in which the account debtor (your customer) is not informed that invoices have been factored. Available through our program at no significant rate premium.
27. Open Contract Factoring
Factoring with no minimum volume requirement. You factor only the invoices you choose, when you choose. Our factoring program offers 100% open contracts — zero minimums, ever.
28. PAYDEX Score
Dun & Bradstreet's business credit score, ranging from 0 to 100, measuring how promptly a business pays its obligations. A score of 80 = on-time payment. 100 = early payment. One of the primary business credit metrics lenders check.
29. Revolver (Revolving Credit Facility)
A credit line that allows borrowing, repayment, and re-borrowing up to the approved limit. The balance fluctuates based on draws and repayments. Designed for working capital, not capital investments. Also the term for a revolving factoring or ABL facility.
30. Draw
An advance of funds from a revolving credit line or construction loan. In a construction context, a draw request triggers inspection and funding of completed work.
31. Maturity
The date on which a loan is due in full. Commercial real estate loans often mature before they're fully amortized, requiring refinancing or sale at maturity to repay the balloon balance.
32. SBA 7(a)
The SBA's primary loan program. Flexible use: business acquisition, equipment, real estate, working capital. Up to $5M. Down payments as low as 10%. Personal guarantee required. Best for established businesses with documented income.
33. SBA 504
The SBA's commercial real estate program. Owner-occupied only. Two-lender structure: conventional first + CDC second. 10% equity. Fixed long-term rate on CDC portion. Best rate/leverage combination for owner-occupied CRE.
34. PLP (Preferred Lender Program)
The highest tier of SBA lender designation. PLPs can make SBA credit decisions in-house, dramatically reducing approval timelines. W. Reynolds Commercial Capital, Inc. is an SBA Preferred Lender.
35. Prepayment Penalty
A fee charged when a loan is paid off early. Varies by loan type: conventional loans may have step-down penalties, CMBS loans have defeasance or yield maintenance. Understanding prepayment provisions before signing prevents expensive surprises at exit.
36. Lock-Out Period
A period during which a loan cannot be prepaid at all, even with a penalty. Common in CMBS loans. Must expire before the loan can be refinanced or the property sold.
37. Spread
The margin above an index rate that determines your loan's interest rate. If the index (e.g., SOFR, Prime) is 5% and the spread is 2.5%, your rate is 7.5%. The spread reflects the lender's assessment of credit and deal risk.
38. Application-Only Program
Equipment or business financing available based solely on a credit check and basic application, without tax returns or financial statements — typically available up to $350,000.
39. Storied Credit
Industry term for a borrower with a complicated credit history — past issues, prior bankruptcies, derogatory marks — that tells a nuanced story beyond a simple credit score. Asset-based and specialty lenders specifically serve storied credit borrowers.
40. A through D Credit Profiles
A = excellent credit. B = good credit, minor blemishes. C = challenged credit, some significant derogatory history. D = significantly impaired credit. Not all programs work for all credit profiles, but options exist across the entire spectrum.
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You now know the language. Let's put it to work.
The commercial finance world rewards borrowers who are prepared — who know their numbers, understand the products, and can have an informed conversation with a lender. This glossary is one piece of that preparation.
The next step is applying this knowledge to your specific situation. That's where I come in.
Bookmark this. Share it with your business partners. And when you're ready to put these terms to work, give me a call.
John Reynolds Weaver, CEO — W. Reynolds Commercial Capital, Inc.
(325) 440-5820 | john@reynoldscomcap.com | [reynoldscomcap.com
Disclaimer
While this article accurately reflects the combined capabilities of all lenders and technology partners with whom W. Reynolds Commercial Capital, LLC has a relationship, not every lender will have all of these capabilities. Not all lenders will have the same services, technology platforms, pricing structures, or program features, and this article in no way guarantees the availability of any specific feature, advance rate, same-day funding, 24/7 portal access, proprietary early-pay software, insurance-backed protection, fuel card integration, or any other service for any individual borrower or transaction.
All financial solutions are subject to credit review, underwriting, due diligence, and final approval by the respective funding partner. Actual terms, conditions, and availability may vary based on the client, invoice quality, industry, collateral, and the policies of the selected lender.
This article is provided for informational and educational purposes only and does not constitute a commitment, offer, or guarantee of funding or any particular terms.
For a no-obligation review of your business financing needs and the options currently available through our network, please contact us directly.
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