When shopping for and applying for a small business loan, you will inevitably come in contact with numerous jumbled and confusing loan acronyms that require you to do some solid research in order to understand them.
Fortunately, we have compiled the most common loan acronyms in to a handy list to help make deciphering lending language that much easier.
Automated Clearing House. An electronic network that processes financial transactions by transferring funds from one account to another through public and private sectors. You can set up your loan payments to be made by ACH transactions to make sure you don’t miss a payment.
Annual Percentage Rate. APR compiles your loan’s yearly interest rate with any fees or additional charges you’d have to pay for that cash. In short, it’s the true cost of a loan.
Asset-Based Loan. An ABL is secured by business assets - most often inventory or receivables. Lenders make these loans based on a formula that calculates a percentage of those assets’ value. The percentage can vary depending on the type of collateral.
Borrower Viability Index. Your BVI is similar to a credit score, but takes into account a broader range of factors that tell a lender more accurately if you are qualified for a business loan. The BVI considers your credit score, but puts more weight on things like track record, profit and loss metrics and intent.
Certified Development Company. The Small Business Administration certifies and regulates these nonprofit organizations, which work with participating lenders nationwide to lend to small businesses under the SBA’s 504 Loan Program. SBA 504 loans provide financing for the purchase of major fixed assets like real estate or equipment.
Community Development Financial Institution. These financial institutions, generally banks, credit unions, or loan funds, are government-certified organizations that offer financial services to underserved markets and individuals. CDFIs might offer business loans to entrepreneurs who can’t get traditional financing as well.
Current Portion of Long-Term Debt. This figure represents the amount of long-term debt that you need to repay within one year.
Debt Service Coverage Ratio. This ratio tells lenders how much cash you have available to service the debt you’re considering taking on. Lenders arrive at this figure by dividing your company’s net operating income by the amount you’ll need for debt service. This is an important number, because if you don’t have adequate cash to service your debt, lenders won’t front you the money you’re looking for.
Earnings Before Interest, Tax, Depreciation, and Amortization. This is a measurement lenders use to assess your company’s creditworthiness and your ability to pay back your debt.
Fair Isaac Corporation. FICO is the largest and most well-known company that provides software for calculating a person’s credit score.
Generally Accepted Accounting Principles. Standards set by the Financial Accounting Standards Board of accounting principles, standards and procedures that companies use to compile their financial statements for potential lenders.
Independent Sales Organization. ISO is an individual or organization that is not an Association member (ie. Not a Visa or MasterCard member bank), but still has a bank card relationship with an Association member bank. ISO’s provide payment-related services to members of an Association, either directly or indirectly, including customer service, sales, merchant solicitation and training activities.
Loan Officer. The person at the lending organization who handles your loan.
Line of Credit. A type of financing where a lender extends you credit for a certain amount that you can draw on whenever you need. You don’t have to start repaying the credit line until you actually draw from it, and once you repay all the money, you’ll again have access to the full amount of the credit line.
Long-Term Debt. Long-term debt is any loan that has a maturity date of more than one year in the future.
Loan-to-Value Ratio. The ratio of outstanding debt to the value of the collateral for the loan. Lenders will have a maximum LTV they’re willing to accept, depending on the type of collateral you’re putting up for the loan.
Principal and Interest. Figures combined by your LO to calculate your scheduled loan payment amounts.
Property, Plant, and Equipment. This term describes business assets or property that is not liquid—in other words, it can’t be quickly turned into cash. PP&E is also sometimes known as fixed assets or tangible assets. This is in contrast to liquid or current assets, like cash or money in the bank.
SBA
The U.S. Small Business Administration. The SBA provides a wide variety of resources and services to small business owners. Most importantly for borrowers, it guarantees small business loans—known as SBA loans.
The SBA doesn’t actually make loans. Instead, it works with approved lenders and guarantees a certain percentage of the money they lend to small businesses via SBA loans, typically 80-90%. The SBA’s main guaranteed loan program is the 7(a) loan.
Small Business Scoring Service. The SBA’s loan guaranty processing center uses SBSS scores when screening small businesses loan applicants. The SBSS score, generated by FICO, is based on factors like the business’s credit history and the business owner’s individual FICO score. The SBSS score can range from 0 to 300, and in 2014, the SBA set a minimum score of 140 to be considered for its 7(a) loan program.
United States Department of Agriculture loans, offered through the agency’s Rural Department of Business and Industry, help to develop or finance businesses with a goal to improve the economic and environmental climate of rural communities. Like SBA loans, many of these loans programs provide guarantees to lenders to encourage lending.