The plain-English dictionary of business funding.
Forty terms every small-business operator should know, defined without the jargon and without the upsell. Written by underwriters who use these words every day — not by marketers who Googled them.
ACH
Automated Clearing House — the U.S. electronic funds transfer network used to move money between bank accounts. In small-business funding, ACH is the standard mechanism for daily or weekly repayment debits on merchant cash advances and most term loans. Funders pull the agreed payment directly from your operating account; you authorize the recurring debit via the funding contract. ACH transfers settle in one to two business days, are reversible within a short window for unauthorized transactions, and are dramatically cheaper than wire transfers for recurring payments. NSF returns on ACH debits are the most common early-warning sign of borrower distress.
Advance
In alternative business finance, an 'advance' refers to a merchant cash advance or working-capital advance — capital provided in exchange for a fixed dollar amount of future revenue, repaid through daily or weekly ACH debits. The term is intentionally distinct from 'loan' because the underlying contract is structured as a purchase of receivables rather than a debt instrument. An advance has no APR in the regulated sense, no amortization schedule, and no fixed maturity date — repayment timing depends on how fast revenue arrives. The cost is expressed as a factor rate rather than an interest rate.
APR
Annual Percentage Rate — the standardized annualized cost of borrowing, expressed as a percentage of principal per year. APR is required disclosure on consumer loans and most regulated business loans (SBA, bank term loans, business credit cards) and allows direct cost comparison across instruments with different fee structures. APR is not required disclosure on merchant cash advances in most states because MCAs are contractually purchases rather than loans. To compare an MCA factor rate to a bank loan APR, multiply the factor by 100, subtract 100, divide by the payback term in months, and multiply by 12.
AR Financing
Accounts receivable financing — an umbrella term for working capital advanced against outstanding B2B invoices. Includes invoice factoring (where the invoice is sold to the factor) and invoice financing (where the invoice is collateral for a loan but stays in the seller's name). Typical advance rates run 80–95% of invoice face value, with the remainder held in reserve until the customer pays. Fees are charged as a percentage of face value per 30-day period the invoice is outstanding. AR financing fits B2B businesses with creditworthy customers on net 30/60/90 payment terms — staffing, trucking, wholesale, commercial services.
Bridge Loan
Short-term financing designed to cover a gap between two events — typically a current capital need and a future, defined source of capital that will pay off the bridge. Bridge loans run 3 to 18 months, price higher than long-term debt because of the short duration and elevated risk, and are usually structured as interest-only with a balloon payment at maturity. Common scenarios: bridging until an SBA loan closes, bridging until a property sale completes, bridging between funding rounds for venture-backed companies. The defining feature is that the exit (the repayment source) is identified and reasonably certain at origination.
Business Credit Score
A numerical assessment of a business entity's creditworthiness, separate from the personal credit of the owners. The three main scoring systems are Dun & Bradstreet's Paydex (1–100, measures payment history with trade creditors), Experian Intelliscore Plus (1–100, broader credit assessment), and Equifax Business Credit Risk Score (101–992). Business credit scores draw from trade payment data, public records (liens, judgments, bankruptcies), industry risk factors, and business size. Established business credit reduces reliance on personal guarantees and unlocks larger credit lines, but most small-business lending still weighs personal credit heavily.
Cash Flow
The net movement of cash into and out of a business over a defined period. Positive cash flow means more cash is coming in than going out; negative cash flow means the opposite. Cash flow is distinct from profit — a business can be profitable on paper while running negative cash flow (common when accounts receivable are growing faster than collections). For working-capital lenders, cash flow is the primary underwriting variable: bank statements show actual cash movement over time, which is a more honest picture of operational reality than P&L statements or tax returns.
Collateral
A specific asset pledged as security for a loan. If the borrower defaults, the lender has the contractual right to seize and sell the named collateral to recover the debt. Common business loan collateral includes commercial real estate, business equipment, vehicles, inventory, accounts receivable, and intellectual property. Collateral is distinct from a personal guarantee — collateral is a specific asset; a guarantee is a contractual promise from a human signer. Secured loans (with collateral) generally price lower than unsecured loans because the lender's recovery is more certain in default.
COJ (Confession of Judgment)
A contract clause in which a borrower waives the right to defend against a lawsuit and pre-consents to entry of judgment in favor of the lender upon default. COJs allowed alternative lenders to obtain rapid judgments and freeze borrower bank accounts without traditional litigation. New York's 2019 law eliminated COJ enforcement against out-of-state borrowers, and subsequent state-level legislation has further restricted their use. Most modern MCA contracts no longer include enforceable COJs, but they remain in some legacy contracts and a small number of state jurisdictions. Their presence in any new funding contract should prompt careful review.
Daily Remittance
The fixed daily ACH debit a borrower makes to a funder on most merchant cash advances and short-term loans. Daily remittance amounts are calculated by dividing the total payback amount by the estimated number of business days in the term. On a $130,000 payback over 130 business days, the daily remittance is $1,000. Daily remittances run Monday through Friday on most contracts, skipping weekends and federal holidays. The structure is administratively simpler than a true holdback (which flexes with daily revenue) but doesn't automatically ease pressure on slow days.
Default
A breach of the funding contract's payment or other material terms. The most common default trigger is multiple consecutive missed or returned ACH debits, typically three or more depending on the contract. Other default triggers include bank account closure without notice, sale of the business without consent, additional advances without disclosure (stacking violations), or material misrepresentation in the original application. Default remedies vary by instrument: traditional lenders pursue judicial collection; MCA funders may invoke confession-of-judgment clauses where enforceable, pursue UCC remedies, or accelerate the full payback amount.
EIN
Employer Identification Number — the federal tax ID issued by the IRS that identifies a business entity for tax and reporting purposes. An EIN is required to open a business bank account, file business tax returns, hire employees, and apply for most business credit and loans. Sole proprietors can use a Social Security Number in lieu of an EIN, but most working-capital lenders require an EIN even for sole props to confirm the business is an operating entity rather than personal-finance pass-through. Applying for an EIN through the IRS is free and takes about 10 minutes online.
Factor Rate
A multiplier used to express the total cost of a merchant cash advance or short-term working-capital advance. A factor rate of 1.30 on a $100,000 advance means the borrower repays $130,000 total. Factor rates typically range from 1.10 to 1.50 depending on credit profile, time in business, monthly revenue, and term length. Factor rates are not interchangeable with APR — the same factor rate produces very different APRs depending on how quickly the advance is repaid. To compare a factor rate to an APR loan, convert using the payback term in months.
Factoring
The sale of invoices to a third party (the factor) at a discount in exchange for immediate cash. The factor advances 80–95% of the invoice face value upfront, then collects from the customer and releases the remaining reserve (minus their fee) when payment arrives. Factoring is distinct from invoice financing, where the invoice is collateral for a loan but remains in the seller's name. Factoring relationships are typically ongoing — a master factoring agreement covers all qualifying invoices going forward, with funding decisions made on a per-batch basis. Common in staffing, trucking, wholesale, and commercial services.
FICO
The credit scoring model developed by Fair Isaac Corporation and used by most U.S. lenders to assess personal creditworthiness. FICO scores range from 300 to 850, with higher scores indicating lower credit risk. Components: payment history (35%), credit utilization (30%), length of credit history (15%), credit mix (10%), and new credit inquiries (10%). In small-business lending, the personal FICO of the principal owner is a primary underwriting variable on nearly every product. SBA loans typically require 680+ FICO; alternative lenders work down to 500 FICO with strong cash flow compensating for lower credit.
Funding Speed
The time from application submission to capital wired into the borrower's operating account. Funding speed is the defining trade-off in small-business finance: faster products are generally more expensive, slower products are generally cheaper. Realistic ranges: merchant cash advance same-day to 48 hours; working capital term loans 3 to 14 days; bank lines of credit 30 to 60 days; SBA 7(a) 45 to 90 days; SBA 504 60 to 150 days. The right product for any given deal is partly a function of which funding speed bracket the use case can tolerate.
Guarantor
A person who contractually agrees to be responsible for a debt or obligation if the primary borrower fails to pay. In small-business lending, the principal owner is almost always the guarantor on any working-capital advance, term loan, or SBA loan. Personal guarantees are nearly universal because small businesses are not credit entities the way large corporations are — the lender is effectively underwriting the human behind the business. A guarantor's personal credit, personal financial statement, and personal assets become potential recovery sources if the business defaults. Multiple owners with 20%+ stakes typically all sign as guarantors.
Holdback
The percentage of daily revenue a merchant cash advance funder collects until the purchased amount is paid down. Holdbacks typically run 8% to 20% of daily card volume on traditional MCAs that integrate with the credit-card processor, automatically pulling the agreed percentage from each day's settlements. True holdbacks flex with revenue — a slow Tuesday pulls less, a busy Saturday pulls more — which means seasonality is absorbed automatically by the structure. Distinct from a fixed daily ACH, which approximates a holdback at a static dollar amount and doesn't automatically ease during slow periods.
Invoice Financing
A loan secured by outstanding accounts receivable. The lender advances a percentage of the invoice face value (typically 75–90%) as a secured loan, the seller continues collecting from customers in their own name, and the seller repays the loan when the customer pays. Distinct from factoring, where the invoice is sold rather than collateralized. Invoice financing keeps the customer relationship intact — the customer doesn't necessarily know a lender is involved — but typically requires stronger borrower financials than factoring because the lender has less control over collections. More common for larger, more established businesses.
Line of Credit
A revolving credit facility that lets a borrower draw, repay, and re-draw funds up to a maximum approved limit. Interest accrues only on the drawn balance, not on the full line. Lines of credit are the most flexible form of business capital — useful for cyclical working-capital needs, unexpected expenses, and bridging timing gaps between revenue and obligations. Bank lines of credit are typically secured by assets and require strong credit (often 680+ FICO, two years in business, audited financials for larger lines). Alternative lender lines of credit are easier to qualify for but smaller and more expensive.
MCA (Merchant Cash Advance)
A working-capital instrument structured as a purchase of future receivables. The funder buys a fixed dollar amount of the business's future revenue at a discount, paying the discounted amount upfront and collecting the full purchased amount over time through a daily or weekly ACH debit or a credit-card processor holdback. MCAs are legally not loans — there is no interest rate, no amortization, and no fixed maturity. Cost is expressed as a factor rate. MCAs are the fastest commercial small-business capital available (often same-day funding), with the trade-off being high effective APR (35–90% depending on structure and term).
Mobilization
Capital deployed to ramp up operations for a newly-won contract before billing begins. Common in commercial construction, government contracting, and large-scale staffing engagements — the contractor needs to hire crews, buy materials, mobilize equipment to the job site, or onboard workers before any invoices can be sent. Mobilization financing bridges the gap between contract award and first invoice. Working-capital advances, AR financing on the future invoices, and short-term term loans are common mobilization structures. The deal-specific nature of mobilization makes it particularly well-suited to revenue-purchase advances tied to the new contract.
NSF
Non-Sufficient Funds — a banking term used when a check or ACH debit is returned because the account doesn't have enough money to cover the transaction. In small-business funding, the NSF count on bank statements is a critical underwriting variable. An account showing 3+ NSF events in 4 months signals borrower distress and either lowers the offered amount, raises the cost, or results in decline. NSF returns on existing funder debits are a particularly serious red flag because they indicate the borrower is already struggling with current debt service. A clean NSF history is one of the strongest credit signals in alternative-lender underwriting.
Payback Amount
The total dollar amount a borrower is contractually obligated to repay on a merchant cash advance or factor-rate-priced instrument. Calculated by multiplying the advance amount by the factor rate. A $100,000 advance at a 1.32 factor has a payback amount of $132,000. The payback amount is fixed at origination — it does not change based on how quickly or slowly repayment occurs, which means paying off an MCA early does not save the borrower money the way prepaying a regular loan does. Some funders offer prepayment discounts as a contractual courtesy; absent that, the full payback is owed.
Personal Guarantee
A contractual promise from a human signer (typically the principal business owner) to be personally responsible for a business debt if the business fails to pay. Personal guarantees are nearly universal in small-business lending because small businesses are not standalone credit entities the way large corporations are. A personal guarantee is distinct from collateral: it does not pledge a specific named asset; it pledges the personal recourse of the signer. In default scenarios, the lender can pursue the guarantor through standard collection processes, civil judgment, and wage garnishment subject to state law.
Prepayment Discount
A reduction in the payback amount offered by some merchant cash advance funders to borrowers who pay off the advance early. Because the legal structure of an MCA is a purchase of receivables rather than a loan, the full payback amount is contractually owed regardless of repayment speed. A prepayment discount is a contractual courtesy — typically a reduction of 5–15% off the remaining payback if the borrower settles within a defined early-payment window. Prepayment discounts are not universal; some funders offer none. The discount terms should be reviewed before signing if early payoff is a realistic possibility.
Reverse Consolidation
A funding structure used to relieve daily-debit pressure on a business carrying multiple stacked merchant cash advances. The consolidating funder makes daily payments into the borrower's account that the borrower then uses to pay the existing advances, effectively replacing multiple painful daily debits with a single, longer-dated obligation to the consolidator. Reverse consolidation differs from a traditional consolidation (which pays off the existing advances directly) by working around scenarios where the existing funders won't accept payoff. The structure is expensive and complex; it works in specific distress scenarios but is not a general-purpose product.
Revenue-Based Financing
A funding structure where the lender advances capital in exchange for a fixed percentage of monthly revenue until a defined payback amount is reached. Revenue-based financing is structurally similar to a merchant cash advance but designed for businesses with predictable recurring revenue — SaaS, subscription services, software-enabled services. The percentage-of-revenue mechanic means payments scale automatically with the business: faster growth pays back faster, slower months reduce the payment. Effective APR typically runs 18–35%, materially cheaper than MCA. Funding speed is faster than SBA (typically 2 weeks) and slower than MCA (typically 1 week).
SBA 7(a)
The Small Business Administration's flagship loan-guaranty program. The SBA does not lend directly; it guarantees 75–85% of qualifying loans made by participating commercial lenders, which reduces lender risk and enables financing for small businesses that wouldn't otherwise qualify for conventional credit. 7(a) loans can be used for working capital, equipment, real estate, business acquisition, and debt refinancing. Maximum loan size $5 million, terms up to 25 years on real estate, up to 10 years on working capital and equipment. Current pricing 9–12% APR. Timeline 45–90 days from application to funding.
SBA 504
An SBA program designed specifically for the purchase of long-term fixed assets — commercial real estate, large equipment, and major facility improvements. The 504 structure is a three-party loan: 50% from a commercial bank, 40% from a Certified Development Company (a nonprofit partner of the SBA), and 10% from the borrower as down payment. Maximum loan size up to $5.5 million on most projects. Long amortization (10, 20, or 25 years) matches the economic life of fixed assets. Pricing is typically below 7(a) because of the structural risk reduction from the CDC participation. Best for owner-occupied real estate purchases.
SBA Microloan
The SBA's small-loan program, providing loans up to $50,000 (average loan size around $13,000) through nonprofit intermediary lenders. Microloans are designed for very small businesses, startups, and underserved markets that don't qualify for 7(a) or 504. The intermediary lenders are typically CDFIs and community-focused nonprofits that combine the capital with technical assistance and business mentorship. Pricing varies by lender but is generally 8–13% APR with 6-year maximum terms. Use cases include working capital, inventory, equipment, and supplies. Cannot be used for real estate or to refinance existing debt.
Secured Loan
A loan backed by specific collateral pledged by the borrower. If the borrower defaults, the lender has the contractual right to seize and sell the collateral to recover the debt. Secured loans price lower than unsecured loans because the lender's recovery is more certain in default — typically 5–15 percentage points of APR cheaper. Common secured small-business loans include SBA real-estate loans (secured by the property), equipment financing (secured by the equipment), and asset-based lending lines of credit (secured by inventory and receivables). The trade-off for the lower cost is asset risk in default scenarios.
Soft Pull / Hard Pull
Two types of credit inquiries with different consequences for the consumer's credit score. A soft pull (also called soft inquiry) checks credit without affecting the score — used for pre-qualification, background checks, and account reviews by existing creditors. A hard pull (hard inquiry) shows up on the credit report and may slightly lower the score (typically 2–5 points, recovered within 12 months). Most alternative lenders use soft pulls during qualification and only conduct hard pulls at final closing on larger deals. SBA and bank loans always trigger hard pulls during underwriting.
Stacking
Taking on multiple merchant cash advances simultaneously without disclosing the existing advances to the new funder. Stacking is contractually prohibited by most MCA agreements and is considered a default trigger by funders who discover it. The practical danger of stacking is compounding daily-debit pressure: each new advance adds another daily ACH to the borrower's operating account, shrinking the cash cushion that absorbs slow weeks. Operators with two or more stacked positions are statistically far more likely to default. Reverse consolidation is the structured way to unwind a stacked position; informal renegotiation with existing funders is the alternative.
Term Loan
A fixed-payment loan with a defined maturity date, interest rate, and amortization schedule. The borrower receives the principal upfront and repays through scheduled payments (usually monthly) over the term. Term loans are the most familiar small-business credit structure: SBA 7(a), bank business loans, equipment financing, and alternative-lender term loans all share the basic structure. Distinct from revolving credit (lines of credit) and revenue-purchase advances (MCAs). Term lengths range from 6 months to 25 years depending on the use case and asset being financed. Pricing reflects credit profile, collateral, and term length.
True-Up
A contractual reconciliation in a merchant cash advance where the daily debit amount is adjusted up or down based on actual revenue performance. True-ups exist in MCA contracts with reconciliation clauses — typically allowing the borrower to request a reduction in the daily debit if revenue has fallen materially below the level estimated at origination. The funder reviews recent bank statements, recalculates an appropriate daily amount, and adjusts the schedule. True-up rights are an important contract protection for borrowers in seasonal or volatile businesses; their absence in a contract is a significant red flag.
UCC Filing
A public-record financing statement filed under the Uniform Commercial Code that gives notice of a creditor's security interest in business collateral. UCC-1 filings are made with the state secretary of state and create priority ordering among multiple creditors claiming interest in the same assets. In small-business funding, nearly every working-capital advance includes a UCC-1 filing against the business entity, even when the funding is technically unsecured — the UCC serves as notice rather than as a lien on a specific named asset. The UCC filing appears in business credit reports and is visible to subsequent lenders.
Underwriting
The process by which a lender evaluates a borrower's creditworthiness, the proposed use of funds, the available collateral, and the overall risk of the transaction. Underwriting determines whether to approve the loan, at what amount, and on what terms. Small-business underwriting variables include personal FICO, business credit, time in business, monthly revenue, NSF count, existing debt service, industry classification, available collateral, and the borrower's experience. Different lenders weight these variables differently — banks emphasize financial statements and collateral; alternative lenders emphasize bank statements and recent cash-flow patterns.
Unsecured Loan
A loan made without specific collateral pledged by the borrower. The lender's recourse in default is the borrower's general credit, the personal guarantee from the principal owner, and any UCC-1 filings establishing priority against future creditors. Unsecured loans price higher than secured loans — typically 5–15 percentage points of APR more — because the lender bears more risk. Common unsecured small-business products include working-capital advances, alternative-lender term loans, business credit cards, and most online business loans. The trade-off: faster underwriting and easier qualification in exchange for higher cost of capital.
Working Capital
The cash a business needs to fund day-to-day operations — payroll, rent, inventory, utilities, supplier payments, marketing, and the dozens of other recurring obligations that keep the business running. Working-capital financing is the broad category of business funding that addresses these operational needs, as distinct from capital expenditure financing (equipment, real estate) or growth financing (acquisitions, major expansion). Common working-capital products include merchant cash advances, short-term term loans, lines of credit, AR financing, and SBA 7(a) working-capital tranches. The right product depends on speed needs, cost tolerance, and revenue predictability.
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